Opportunities for Bond Investment in Nigeria and How You Can Tap Into them
By Acceler8now.com Bond Investing Team August, 2007
If you are looking to invest in bonds and wondering whether you can do so locally, the answer is clearly 'yes!'. There is a bond market in Nigeria and bond issues you can invest in. What's more, the opportunity to invest is an on-going process, meaning that whenever you are ready for it, you can buy.
The Market
The Nigerian bond market, like elsewhere on the globe, has two bond purchase windows: a primary bond market for now issues and a secondary market for trading in existing bonds. So, if, for instance, you are more interested in short-dated bonds, you can find bonds nearing maturity in the secondary market.
However, we must quickly point out that the Nigerian bond market is currently what can be described as a mono-product market - only the Federal Government of Nigeria series bonds are traded. Though some state governments issued some in recent years, all have been redeemed. No corporate bonds are currently in the market, as companies seem to prefer equity funding. While the "full faith and credit of the Federal Government of Nigeria" backing and the fact of their being "charged upon the general assets of Nigeria" make the FGN bonds top grade, the lack of variety in the market is clearly a minus. Investors have different levels of risk tolerance and may not all be too excited about the low risk feature of the FGN bonds. Some may prefer higher risk corporate bonds of different risk ratings, if they were available, since their yield will be higher, a reflection of the increased risk. For instance, in other markets, some investors target a dose of high-yield (low quality) bonds, the so-called junk bonds (usually of companies with poor risk rating). Anyway, for now, you must make do with the FGN bonds, if you want to invest. One good thing: you buy bonds generally considered risk-free.
Key Players
The following are the key players in the bond market, in our current setting:
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The Debt Management Office (DMO). Though the Federal Government of Nigeria is the issuer of the bonds, it has the DMO as its representative and Issuer's Agent to the bond issues. The DMO also appoints the Primary Dealers/Market Makers (PDMMs), financial institutions approved to deal in the FGN bonds in both the primary and secondary markets.
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The Central Bank of Nigeria (CBN). The Agent Bank to the issues and manager of the bond auction process. Bids for bonds are submitted to the CBN by PDMMs.
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Primary Dealers/Market Makers (PDMMs). Currently, 15 financial institutions are approved as PDMMs. Only they can deal directly in the FGN bonds, meaning that any investors who wishes to buy must go through them or through a stockbroker who then goes through the PDMM. A list of currently approved PDMMs can be accessed here.
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You, the Investor. Completing the chain is the investor or potential investor. Investing in bonds is open to any institutional or individual investor who is interested in bond investment.
Buying/Selling Procedure
Would you like to buy bonds? Well, like with most securities investments, the big job is in taking your decisions. That's because when you choose to act, there are institutions and professionals equipped enough to smoothen the process for you. Most times, all the effort you require is simply in selecting which one to work with, since there is need for care in doing so. The rest is likely to be easy: you give a mandate (instructing as to what you want), fund an account and sit back tp monitor. The operator carries out your instructions and advises you. With bonds, that's not much different.
Primary Market - (purchase only)
Here, only primary purchases are made. Primary purchases are purchases of fresh bond issues of full tenor. This contrasts with buying existing, short-dated (part of tenor already spent with another investor) bonds.
Auction Information: Auctions are usually advertised in the leading newspapers, by the Central Bank of Nigeria, on behalf of the DMO, before the auction dates. Information on impending auctions can also be found on the web sites of the CBN and the DMO. For instance, third quarter 2007 FGN bond auctions are scheduled for July 25th (done), August 29th and September 26th.
Bid Process: To buy, an intending investor collects the application form from the CBN or downloads same from the website of the CBN or DMO. An investor completes the form and submits to a PDMM which will execute the process of submission and participation in the auction. Which brings us to the point that bond purchases are through an auction process. What this means is that an investor must decide a bid rate. The CBN does not set interest rate (the coupon) for the bond offer but lets the buyers determine the rate through the auction process. The marginal rate that clears the volume that is offered or the highest accepted rate from the auction will be the coupon. How do you decide the rate to bid. Your best bet initially is to get advice from a PDMM. As you follow the bond market and bond prices, you will possibly be more comfortable with picking your rates eventually.
Bond Units: The bonds are offered in units of N1,000 each. However, a minimum subscription of N10,000 (and units of N1,000, thereafter) is required. Once you can meet this condition, you can get going with a purchase.
Secondary Market
Purchases and sales of short-dated bonds take place in this resale market. Want to sell your bond or to buy from the secondart market? Simple: see any of the PDMMs and they will guide you and carry out your transaction instructions. The PDMMs, asauthorised dealers, are in the business of buying and selling these securities on behalf of their investor clients. Buying or selling bonds is not a complicated process and the PDMMs are there to execute your transactions.
What Next?
That's up to you, but there are bonds you can invest in and the process is clear-cut. Do you have to buy bonds? That depends on your investment calculations, but there are good reasons to investment in bonds, top of which may be the portfolio diversification objective. More on reasons for bond investment can be found in this article on the subject.
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