24 January 2013

Africa: IFC Prepares to Launch Nigerian Local Currency Bond

The International Finance Corporation is set to launch its first naira-denominated bond.

The International Finance Corporation will issue a five-year naira-denominated bond aimed to deepen Nigeria’s non-sovereign debt market. The private sector arm of the World Bank winds up investor meetings in Abuja and Lagos today, and will auction the paper "imminently", officials told This is Africa.

The international finance institution hopes to raise $50m from its first naira-denominated bond, using the proceeds to finance its local operations.

The bond, which is the first to be issued by a non-resident in the country’s domestic market, should deepen the market, encouraging domestic businesses to tap fixed income investors for much-needed finance, Jingdong Hua, vice president and treasurer at IFC said in a telephone interview.

Nigeria boasts one of the region’s largest local currency bond markets, and its inclusion in JP Morgan’s emerging market Government Bond Index last October could attract up to $1.5bn in international investment.

However, most of the $35bn of listed naira-denominated bonds are issued by the government, while the corporate market remains underdeveloped and is dominated by the country’s major financial institutions. In 2012 there was only one local bond from a private issuer: a $2.5m note from Citi. Overall, the Nigerian corporate bond market accounts for around only 1 percent of GDP.

The new note will develop local markets through reduced transaction costs – primarily a result of lower fees – and a streamlined issuance process, IFC says.

“We have worked with underlying regulators to start putting the pieces of the puzzle in place. Nigeria’s SEC has already made a number of amendments to its fee structure, which has certainly improved the process, because historically one of the impediments to issuances can simply be the cost of doing it,” says Andrew Cross, IFC’s principal financial officer.

Deeper local debt markets would benefit African businesses, which despite a period of sustained economic growth face huge financing constraints. “All that businesses want is to borrow money efficiently without worrying about foreign exchange risk. Access to local currency is what they need,” Mr Hua says.

Triple-A rated IFC has previously issued in Moroccan dirham, South African rand, and both West and Central African CFA franc, and has raised $850m from locally-denominated bonds in the last five years.

Last May it launched a pan-African bond programme to form multi-year agreements with governments to allow it to issue local-currency debt over a period of years. The setup should prevent IFC from having to seek repeated approval each time it sees a market opportunity.

Last year, Ghana approved local currency issuances worth the equivalent of $1bn over the next 10 years, and IFC is seeking regulatory and government approval to start the programme in Nigeria. More will follow: “We are close to agreements with eight or nine countries”, Mr Hua says.

The Nigerian bond is targeted at local banks as well as international investors. However, the big interest is likely to come from Nigeria’s 21 growing pension funds, which are diversifying their fixed income holdings under newly revised regulations. No coupon has been set.

IFC hopes it can replicate success in China in sub-Saharan Africa’s second biggest economy. “When IFC entered the Chinese market in 2005, China’s corporate bond market was about 5 per cent of GDP in terms of market capitalisation. Since then it has exploded to about 25 percent of a much bigger GDP,” Mr Hua says. “The fact that we are entering the Nigerian market at an earlier stage of development means that we can be the catalyst and be able to influence the markets and regulators much earlier in the stage.”

IFC is one of a growing swathe of supranationals issuing debt on the continent, including African Export-Import Bank, and the African Development Bank.

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