interviewBy Goddy Egene
Mr. Sonnie Ayere is the Chief Executive Officer of Dunn Loren Merrified, a leading investment banking firm. In this interview with Goddy Egene, he spoke on sundry financial and investment issues. Excerpts:
How will you assess the performance of the financial system in 2012?
For the financial markets, 2012 was an abysmal year. It was not a good year at all for financial markets. For the banking sector, it was better. And for what I will classify as the securities market, it was a very difficult year indeed.
The capital market declined by 16.3 per cent in 2011 but rose by 34.5 per cent in 2012. If you look at this performance of the capital market, will you still say 2012 was a bad year?
First of all, the idea of the capital market being the stock market is wrong and it is a mistake many people make. The capital market is a lot larger than the stock market. The stock market is just an arm of it. The capital market is the market for capital, whether it is equities or debts. In terms of the equities market, you will recall that the bubble bust in 2008 and stock prices plummeted significantly. What we saw in 2012, to me, is a situation whereby companies are moving back to what I will call their par values. A lot of companies have been trading below their net asset value. So, to me, it is the case of regaining grounds that have been lost. It is a case of coming from negative position to moving back to where I should be.
That is to say, my shares should reflect my net asset value. Most companies have traded significantly below their net asset value per share. When you say the market went up by 34.5 per cent, to me it does not really show real growth because many companies are still trading below their net asset value. We all agree that disclosure is still a bit of a challenge in our market. You may say there might be other reasons a company may not be trading at, what I will call its fair value, but it is only a few companies that are being priced at multiples or real value. What I am saying is that, I am not excited by the fact that the market went up by 34.5 per cent in 2012. We are happy that the growth occurred. It could have been worse but we can do a lot better than that in the equities market.
So what do you think can be done to achieve the real growth you are talking about?
I think what we have today in the market is a lot of sellers and a few buyers. The market grows when you have many sellers and buyers. The area that needs to be addressed today, to me, is the buyers' side. Things like addressing pension fund regulations to take more equities into consideration on a longer term nature of the liabilities of pension fund managers, should be addressed. Pension funds really need to take a long-term view and invest in equities, even if you say only blue-chip stocks. That is one area that needs to be looked at.
The issue of transparency and information disclosure should also be looked at. If companies are more transparent, you will see more international investors taking position in the Nigerian equities market. I was looking at a few pension funds managers' reports recently and it was a surprise to see that about 70 per cent of funds under management are in short term securities. To me, it does not bode well and it is major asset mismatch. If my liabilities are, may be, 10 to 15 years tenure and I am putting that in assets of under one year, that does not really go well. The regulatory authorities should take a very strong look at this area.
But don't you think it is a question of pension fund managers believing that the rates in the fixed income markets are quite attractive now and are safer than equities, hence, their focus on the fixed income securities market with shorter tenure?
I know that rates in the fixed income securities are high. But the point is that people will tell you that when the market corrects, they will shift to the other side. What normally happens is that there is an opportunity. I believe that as a good fund manager, you need to have a balance of your assets portfolio, which is why I like what the new PENCOM rules are proposing. They are proposing that if you are taking on a young person, who just started work, then you could be more aggressive in terms of investments. And for someone who is closer to retirement, you will be a lot more cautious. If I am pension funds administrator, for those maturing in 20 years , I can put them in the equities of some companies at this time and expect to cash out in 15 years . To me, it is a balance between the returns to the fund managers themselves and returns to the contributors.
Talking about attracting foreign investors, there is this belief that the Nigerian equities market is still dominated by foreign investors. What is your response to this?
It is right. If you go back to pre-2008, the market was divided among three classes of investors. The retail, pension funds and international investors. What happened post-2008 is that retail investors virtually died. Most of the retail investors walked away. In fact, there were some rumours that the pension funds were going to be hit in the market. So in such circumstances, I would imagine pension funds and retail investors are now very scared of our market. That leaves only one class of investors - international investors. And most of the time, international investors get out before it blows up and therefore, they can afford to come back before the other set of investors.
That is why, at this point in time, we have seen the international investors dominating. The only way that number ratio will change is when the pension funds begin to realise the need to play in the market after undertaking fundamental analysis of companies. Agreed that the stock exchange is pushing for more information disclosure by listed companies, but getting information from the companies is really difficult. That is something that needs to be addressed. But if pension funds analyse companies and say this company has fair value or less than fair value, let's buy it; now, when we have constant investment going that way, I tell you the equation will change in favour of local investors. I am also happy that those who worked on the Sovereign Wealth Fund (SWF) recommended that part of the SWF should be invested in equities market.
I am not somebody who supports the idea of retail investors buying directly into the market. I do not think it is the wise thing to do. There is no sentiments there, it is not the situation that you are trying to remove the small man from the market; no, that it is not the case. The case I am trying to make is that as an individual who wants to have investment in equities, it is better for me to do that through a collective investment scheme (CIS). I will always advise people that as individuals, you should give your money to professionals to manage for you. One of the major problems we have in the last market crash and till today, is that nobody sits down to analysis companies. But that is what a fund manager does from time to time.
Every day, that is what they do, should we buy, should we not buy, should we sell or hold. So I am more comfortable knowing that my money is being managed by somebody who is doing that every day, then I can focus on my own business that I do. That is why I said it is not the case of kicking out the retail investors but trying to tell them to be smart. If we are able to achieve that, we will move the market toward becoming an institutional market. Apart from pension fund managers, we can also have other asset managers, who now can manage funds on behalf of investors and allow them concentrate on their businesses. A retail investor could be putting aside N10,000 or N50,000 every month and this can be managed by a professional for you into a basket of different equities and every six months you are told the value and you are more comfortable with that.
The Asset Management Corporation of Nigeria (AMCON) was established as a resolution vehicle for the financial crisis. How would assess its performance so far?
AMCON has done a fantastic job. Could you imagine what the situation would have been without AMCON? It would have been totally nasty. The idea of AMCON is a good one and it has done its job fantastically. I am one of those who believe that an institution like that should exist, not necessarily perpetually, but could even play other roles in the Nigerian financial market. For instance, AMCON's ability to foreclose on an asset is something that we need in this country because even though we have foreclosure laws, the success level of foreclosure in the system is almost impossible. Therefore, having an institution like AMCON will mean a lot for the system. But in terms of what it does today as a resolution trust company, it has done a great job. It has cleaned up the banking system and it is funding itself very well.
But there were reports that AMCON posted losses that run into trillions of naira, prompting comments that the Federal Government threw money away?
I do not think that is case. A company of that nature will definitely make a loss because it will take time to recover. To think about it, if the company buys assets at a discount, the idea is that when you buy the asset you now work out a repayment for the amount. It is only after that, that you can sell the assets and recover the amount vis-à-vis the amount used to buy the assets. If you look at the value of the assets AMCON bought, they would yield high returns in the future. It will definitely take time. I feel that the structure of AMCON is fundamentally good.
There is the sale of assets and sinking fund. Do not forget it is the banks that are paying for their own bailout. It is a collective thing. AMCON can sell those assets and the banks are contributing money, if it is not enough, the government will support us. People need to understand that it is not only the government that is going to pay for the losses AMCOM will record, if there will be any at all at the of the day. You have all the banks contributing and if a window is open to co-opt other institutions, they will also be willing to contribute. So it is collective solution. That is why I like the structure of AMCON and the way it has been put together.
Looking at the equities market, there is the argument that market is not deep enough to absorb large companies such as the telcos and oil majors. What is your take on this?
My view is that one of the problems we have in the market is the credit policy. And the level of transparency needs to be improved upon. It does make absolute sense for the telcos and oil firms to come to the Nigerian capital market. The reason is because, generally speaking, the stock market is the barometer of economic activities in a country. And when you have a situation where the stock market does not reflect the economy of Nigeria, there is a problem.
Normally, one way to determine whether the economy is doing well or not is just by looking at the share index. But the index today is not a reflective of the Nigerian economy. Therefore, it does not make sense. I will be hard pressed to accept that if the telcos come to list, there is no individual and pension fund managers that would not want to partake. I think the real reason, I might be wrong, the companies are reluctant to list is because they are not ready to disclose their statements. The companies have no reason not to list their shares. If the market was just a retail market as it was in 2006 and 2007, yes I would agree that we probably do not have the depth.
But at this point in time, the market can absorb any issuance coming from any of those critical sectors, including the power sector. But should they be forced, I do not think so. But can they be cajoled, yes I think they can be cajoled. That is what should happen. Another thing I want to add is the issues of liquidity. Although it is yet to be perfected, but now we have those who are making market in securities. Again, even on the secondary side, the Nigerian Stock Exchange (NSE) has gone to some extent to address the issues that are affecting the market. But to me, the excuses for not coming to the market are diminishing. But you know most of these companies raise their money outside. Even when they want to raise money locally, they still do it in foreign currencies. One of the reasons they look outside to raise money is the cost of capital compared to the Nigerian market. That is also an issue that should be addressed.
Talking about market makers, what is your assessment of the programme so far, as your company is one of the market makers?
Well, it still being perfected. The major thing is that we still need securities lending to be in place. You cannot make market without securities lending. That is one issue that needs to be resolved. The second issue that needs to be resolved is credit lines. The capital requirement for market making is N570 million. The idea is not for you to convert that N570 million of cash into securities. It is for the N570 million to sit in your balance sheet to absorb losses to the extent they may occur. So there is need for me to say how much leverage do I want to put on the back of the N570 million. That will tell me how much lines I would want to have as the maximum. The bottom line is that two areas need to be sorted out: Lines for trading. But this is has not really come off as expected. What the banks should realise is that this is not a margin loan.
What we had before was that a bank would give you a loan, you then go and buy a portfolio of stocks. You then sit and wait and hope that it will increase in value. If it does, you sell the stocks and pay back the bank and you then go and sit. But trading loan is not like that. The idea of a trading loan is that it allows you to draw down to acquire the stock that is needed in the market. For instance, someone says, I want to sell you 10,000 units of security, I draw on my line and pay value. And because I am a trader, immediately I will turn and sell the security at a different price. So, it is in-out, in-out. It is a different ball game from the margin loans.
Coming to the bonds market where you play a big role. There is the issue of the private sector being crowded out by the government. How can this be corrected?
There is major crowding out of the private sector. There is no question about that. Basically, the monetary policy stance over the last two years, which is to tightening monetary policy, has had a negative impact on liquidity in the bonds market. You cannot compete with the Federal Government. And even if you structure your security to triple 'A' level, you cannot compete with the government given the high interest rates. The whole idea of rating in this market is good but most investors do not buy because of rating. I said that because it is not impossible to structure a bond to triple 'A' rating. The Federal Government bond, where people are very sure that they will get their money no matter what whatever happens, and they also enjoy a good yield, that is where investors would prefer going. That is why it has been almost impossible to do much. If you move away from government bonds, no corporate was able to raise funds from the bond market in 2012, even in terms of equities.
This means that the capital formation in 2012 was zero. If companies are not raising funds to strengthen their equity base, it is not good because there is no growth, no employment. Having said that, if you also look at it from the monetary authorities' perspective, they believe there is runaway spending. Therefore, what they are trying to do is rein in this expenditure using the instruments they have. It is a chicken and egg situation. You could understand where the monetary authorities are coming from. The only thing that one could debate is the extent to which inflation can really be checked by interest rate in an economy that is not essentially a credit-driven economy. If I look at the basket of the consumer price index (CPI), it is mainly food and transportation. If you have a drought in Kogi State, you would have a spike in prices and I am not sure how interest rate will check that. Those are the issues that should be examined.
Still on corporate bonds, I know that Dunn Loren Merrified has played a major role in raising bonds for some companies, can you tell us the value of the bonds involved?
When rates were reasonable, we did some bond raising for corporates and governments. There are about N150 billion existing corporate bonds by 10 companies. We took five of those companies to the market. I am somebody who believes that a country cannot make progress if the real sector does not have access to medium to long-term financing especially for its capital expenditure. But again, you have to balance the cost. When interest rates go too high, it becomes almost impossible to for companies to borrow. Going back to 2011, we were very happy to achieve what we have achieved. Even with the Monetary Policy Rate (MPR) still at 12 per cent, because rates are trending downwards and move into single digit level, people will go back and look at the corporate bonds sector again. If state governments are still raising bonds at 14 per cent, corporates would be about 16 and 17 per cent, and that is still too high. The idea is that if states are at 12 per cent and Federal Government around 11 to 10 per cent and corporate s would be around 14 per cent 15 per cent level, which now becomes a lot more reasonable.
Is Dunn Loren Merrified primarily into bond trading?
No, there are five institutions that make up the Dunn Loren Merrified Group. We have Dunn Loren Advisory Partners, which does financial advisory, capital raising and underwriting, among others. That is the company we actually started with. Then we have Dunn Loren Investment Company, which does fixed income trading and currency trading also. We have Dunn Loren Securities, which does equities, stockbroking and market making. We also have Dunn Loren Asset Management and Research Company and we hope to float our first fund this year. We also have a foundation company that covers our corporate social responsibility activities. Across board, we done a lot of advisory jobs, a lot of placements for equities and have handle some acquisitions for companies and mergers. So it is not just fixed income. Fixed income is a major strength of ours. However, it is a full financial services institution.
What is your projection for the Nigerian financial market in 2013?
What can help 2013 different are regulatory issues. For instance, if PENCON passes the new amendments, that will drive the system significantly. If there is an ease in the interest rate (benchmark policy rate), it will also be fine. Again, to me, something like the unbundling of NNPC, though may not happen this year, and then list some of them on the stock market. That would be a major boost to the market. Those are of the things that can bring back confidence in the market this year. Our regulators should work in harmony. An economy can only operate well when you have a functional and balanced financial market. And that can only happen when you have regulators sitting together to take decisions. I know it is not that easy, but is something that we need to achieve, if actually we want to grow this economy and we have to do it.
BIO DATA - Sonie Ayere
Sonnie Ayere has amassed 16 years of solid corporate and structured finance, corporate banking and asset management experience working with HSBC in London, NatWest Bank, The Sumitomo Mitsui Bank, Bank of Montreal - Nesbitt Burns; the International Finance Corporation (The World Bank Group) based in Washington DC and Johannesburg, South Africa, and finally the UBA Group in Lagos.
He began his structured finance career in 1997 at Sumitomo Mitsui Bank, London. Following this, he joined BMO-Nesbitt Burns, London, the investment banking arm of the Bank of Montreal, in 1998 as part of the team responsible for setting up a $20 billion Fixed Income Structured Investment Vehicle In 2001, he joined the Global Structured Finance Group of the International Finance Corporation in Washington DC where he was responsible for originating structured finance and securitisation transactions globally.
He pioneered IFC's interest in developing the Nigerian bond market and was a principal adviser to the Nigerian Debt Management Office on the development of the market. He later joined UBA Group as the pioneer Managing Director/CEO of UBA Global Markets, the investment banking arm of the group in August, 2005. Ayere founded Dunn Loren Merrifield in 2009. He holds an MA (Hons.) in Financial Economics from the University of Dundee, Scotland. He is an Alumni of Cass Business School London (MBA) and London Business School.