The Lagos State government has announced that its second fixed rate bond was subscribed in excess of 249 percent.

The announcement was made by the state's deputy governor, Adebisi Sarah Sosan, who represented Babatunde Fashola, the state governor, at the completion board meeting of the N57.5 billion Lagos State Fixed Rate Bond (Series 2) 2010/2017, issued under the N275 billion State Debt Issuance Programme.

The deputy governor said the second series of the N275 billion bond has recorded the highest level of participation in any bond issued in the capital market.

The Lagos State first tranche bond of N50 billion, issued in 2008, was oversubscribed to the tune of N8.9 billion.

Mrs. Sosan, in a statement on Tuesday, said, 'There was much anticipation in our financial markets when the announcement was made about the first tranche on December 24, 2008. The public offer received a tremendous response from investors, both individuals and institutional, and recorded an unprecedented 117.93 percent level of subscription. Applications in respect of the N50 billion tranche 1 offer amounted to N58,966,760,000.

'The result of the just concluded bond offering is a clear indication that the investing public is keen to partner with the government in the ongoing transformation,' she stated.

The tranche 2 bond issuance of the required N50 billion was sold by Book Build method, solely opened to institutional investors only.

'On April 7, 2010, when the Order Book opened, our Book Runners, led by Chapel Hill Denham Management Limited, were mandated to raise N50 billion. At the close of the Order Book on April 13, 2010, the Book Runners had received bids in excess of 249 percent,' she explained.

State of firsts
Meanwhile, Mr. Fashola, in his speech, said the completion of the board meeting scored many 'firsts' for the state: the first to establish a Bond Issuance Programme, the first to undertake successive bond issuances during the tenure of the same administration, the first to issue a bond without an Irrevocable Standing Payment Orders, the first to issue a bond without any underwriting arrangements, and the first to undertake an offering by way of a book build.

'This administration will continue to observe the strictest standards of fiscal responsibility and take extremely seriously our responsibility as managers of the state's resources; regardless of whether they are financial, human, mineral, agricultural or fall into other categories', he stated.

As explained, the proceeds of the bond will be used to fund the upgrading of the Lagos-Badagry Express Way into a 10-lane highway.

Also, the state water transportation will be expanded, as construction work is already going on at ferry terminals at Ikorodu, Badore, and Osborne.

'Our other plans to develop Lagos include funding of Light Rail Transit Scheme. There are other capital intensive projects that have been earmarked for execution by this administration to develop Lagos into a global city and cater for the welfare of the people,' he declared.

The governor expressed appreciation to all the Issuing Houses, financial institutions, and state lawmakers for enacting the enabling law of Capital Raising Programme, without which the state would not have gone this far in the provision of essential services.

The board meeting witnessed the presentation of Debt Issuance Programme Documents to all the representatives of the state government and the eventual signing of the documents, after the verification of issuance questionnaire by the representative of the state government.

Is the bond mispriced?
Reacting to this development, analysts at Renaissance Capital, an investment advisory firm, said, 'In our view, the pricing of Lagos State's Series II Bond is less attractive than other recent state bonds that were placed in the 14-15.5 percent range. And the 500 bpts yield differential with the interpolated seven-year FGN tenure is somewhat irrelevant, as the sovereign yield curve is fundamentally depressed.'

The experts said while the Lagos State's bond will probably not generate any sizeable secondary market activity, 'we think it is possible the instrument could ultimately trade at a discount should the FGN curve correct as macroeconomic, and financial conditions improve in the future.'