One profitable way to make money in Nigeria is by investing in corporate bonds. The Nigerian corporate bonds market is generating quite a lot interest in recent time; unfortunately, most retail investors do not think about corporate bonds when they are considering their investment options.
This apathy is not peculiar to Nigerian retail investors. Corporate bond is a specialized investment instrument which requires a level of knowledge that may not be easily available to the average man on the street. Hence, companies that issue bonds usually target institutional investors like pension funds, asset managers and insurance companies.
These institutional investors usually have technical units that are staffed with trained analysts whose jobs are to research on investment instruments and make recommendations. However, savvy retail investors can also take advantage of the attractive returns that corporate bonds offer to byuidl long term wealth.
What is Corporate Bond?
In case you don’t know, Corporate Bonds are debt instruments issued by corporate organizations as well as public corporations. While corporate organizations here refer to private sector companies, public corporations are those government owned organizations set up to run as businesses and make profits. With the increasing privatization of public sector institutions, the number of public corporations in Nigeria is becoming less and less.
At the moment the most notable public corporations are the Nigerian National Petroleum Corporation (NNPC), the Nigerian Ports Authority (NPA), Federal Radio Corporation of Nigeria (FRCN) and the Nigerian Television Authority (NTA), etc.
Blue Chip enterprises issue bonds to borrow long term money. Proceeds of bond issue is usually applied to restructure a company’s balance sheet or to enable them finance long term projects or public infrastructure.
How Corporate Bonds Work
Corporate Bond works just like the FGN Bonds except that corporate bonds are riskier. A company may issue bond because it is confident that it is able to meet its obligations and investors will buy up the bond because they believe the company is credible enough to meet its obligations and timely too.
Generally, corporate bonds are secured by the assets and cashflow of the issuing company. For a company to issue bond, it must have undergone a process of rating by an approved and recognized rating agency. Such rating gives a certain level of comfort that the company can be trusted, is able to meet its obligations, has sound corporate governance and has attained a measure of stability.
Corporate bonds offer coupon rates higher than Sovereign bonds, payable on monthly, quarterly or yearly basis through to maturity when the principal investment is redeemed.
There is a strong secondary market for corporate bonds which allows investors to trade it at anytime without having to hold to maturity, hence they can be said to be very liquid.
From the investor perspective, corporate bonds may be safer than stocks in that should the issuing company’s business fails and the company goes bankrupt, bonds holders are creditors who are entitled to be paid after statutory obligations in line with bankruptcy laws; whereas ordinary share holders in this case, would have lost all their investments.
There are three fundamental differences between corporate bonds and ordinary shares:
- Ordinary Shares represent an ownership claim on the company, bond on the other hand represents a creditor’s claim on the company
- In the case of bond, the cashflow in terms of returns and repayment is predictable. A bond holder knows how much his interest is (coupon rate) and when payable including his principal. But for ordinary shares, dividend payment is not certain as it is dependent on the probability of the company making profit. The value of the ordinary share investment is also not predictable at any point in time as this is affected by the profitability of the company and market forces, particularly if shares are qoured.
- Bond may be issued as callable, which means that the issuer may recall the bond and discharge its obligations before maturity. Ordinary shares are not recallable.
History of Corporate Bonds Issuance in Nigeria
The Nigerian corporate bond market was launched in 1960 when the then Broadcasting Corporation of Nigeria issued a ₤210,000 3-year bond maturing in 1963. Unfortunately, the break out of the civil war halted what was otherwise becoming an active corporate debt market. After the civil war that ended in July 1970, the Nigeria corporate bond market struggled. There was only one issue in the rest of the period of the 1970s by the Nigerian Sugar Company, 12 issues in the eighties, 31 in the nineties.
There has been resurgence in the corporate bond market as blue chip companies and some well run local firms look to the debt market to raise long term capital to refinance or take up long term projects. Data from the FMDQ shows that the corporate bond market is valued at over N300 billion and as at the time of writing, there are about 30 corporate bonds listed on the FMDQ OTC platform with some maturing as far as 2030. Some of the companies that have issued bonds include UBA, Lacasera, Dana Group, NBL, Tower Fund, Forte Oil, Lafarge Africa, FCMB, NAHCO, Stanbic IBTC, Dufil, C&I Leasing amongst many others. Recently, a microfinance bank, Lapo MFB issued N3.5 billion 5-year bond at a coupon rate of 17.5%
What is driving the interest in Corporate Bonds?
As a starter, Nigeria undertook a reform of the corporate debt market which gives firms some incentives, reduced transaction fees and allows them to issue bonds at lower coupon rates while in the same vein providing for tax-free returns to investors.
These reforms generally removed the bottleneck around the corporate debt market and help to galvanize interest of companies to access that segment of the debt capital market.
There is now a framework for price discovery and benchmark for valuation purposes which has made it easy for institutional investors to accommodate corporate bonds in their portfolios.
Another factor is the declining yield environment in money market. Treasury Bills which offered as high as 23 percent in 2017, now stops at 15 percent. There is likely hood that rates will go further down as government continue with its programme of refinancing domestic debt with foreign debt. As campaigns for 2019 general elections gather steam in the year, political spending will increase liquidity and taper yields.
Another driver is the fact that yields on sovereign bonds are also declining for same reasons highlighted above and the capital market which ordinarily would have been the beneficiary of the declining yield environment in the money market is in a bearish mode, so portfolio investors such as pension funds, insurance companies and mutual funds are looking to corporate bonds for higher returns.
Moreover, corporate bonds is increasingly becoming a cheaper alternative to bank loans and as long as the issues surrounding high interest rates in Nigeria remain, the corporate bonds market will remain an alternative source of capital to business organizations.
Why Should You Invest In Corporate Bond
Apart from the market driven factors highlighted in the preceding paragraphs, investing in corporate bonds offer some advantages.
- High return on investment (ROI). Some corporate bonds are issued at coupon rates as high as 20 percent per annum
- Bonds are generally stable and offer predictable cashflow/income stream over a period of time.
- Corporate Bonds offer more attractive returns compared to sovereign bonds
- Corporate Bonds offer higher returns than fixed Deposit with banks
- There exist a strong secondary market for corporate bonds which makes it easy for investors to exit
- Ratings of issuers make it possible for investors to measure the relative safety of corporate bonds – the higher the rating, the safer.
How to Invest
Investing in Corporate Bonds is easy. Simply contact your bank or stockbroker for guidance. Your bank or broker will let you know what corporate bonds are being traded, outstanding maturity period and coupon rates.
If you are interested in investing in primary issues your bank will also let you know what new bonds are on offer. You can access the FMDQ website for a list of currently traded corporate bonds.
Generally, when you buy bonds the purchase is settled through a depository. In the case of Nigeria, the depository is the Central Securities Clearing Systems. This means that you will have to open a CSCS account to trade in bonds in Nigeria.
Finally, a successful investor is one who conducts his due diligence before parting with his money. Where in doubt, seek the help of a professional adviser which in this case may be your banker, stock broker, accountant, lawyer or professional investment adviser.