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To debt, to debt, our market’s due for debt?

June 11, 2009

What’s behind the rise in the bank deals that are being frequently splashed on our dailies? You may find some  contradicting, about the political uncertainty in the country, such headlines. While your curiosity may have not been piqued by these headlines it has got me pondering for days. Take the following deals; GT Bank’s $350m Eurobond, UBA $50m debenture from IFC, First Bank’s $100m and FCMB’s $100m deal with HBSC.

Though the deals differ in size they all have an underlining similarity; debt otherwise known as borrowed money. Debt comes in different shades and hues but serves a sole purpose, a robust balance sheet that aids taking on more lending. But like all things too much of it isn’t too good – the balance sheet must strike balance between debt and equity.

Still, these events are signal that banking today in Nigeria is entering a new phase.  Of particular interest is how a number of banks have responded to by raising money from abroad. In a nutshell, paraphrasing an advert by the global investment bank that assisted First Bank in raising the $100m, you may say that the banks realised that their industry, competitors and customers were changing, and so to improve the value of their offering their approach to business had to change too.

To a large extent the change has been propelled by CBN, when the banks were asked to increase their capital base a number of people in the squirmed at the meddling attitude of government regulation, ironically one the most vociferous critics recently closed a landmark deal that will reap the fruits of painstaking effort of decades of banking. Clearly, some banks are responding innovatively to the reality of the landscape which has been the case in other countries where government regulation initially perceived as meddlesome as fostered innovation.

But what’s so innovative about getting foreign money? Here’s the catch; both GT Bank and FCMB have managed to raise a bulk amount of forex that would have been impossible through the weekly Wholesale Dutch Auction System (WDAS)[1]. Thus making them the default ports of call for any business within or outside Nigeria – importers and exporters, which need a solid financial partner that can meet its demand for forex. Besides, such a company will probably entrust its other money needs to the bank e.g. cash management.

You may also be wondering what a Eurobond and a privately placed non-secured structured debt instrument are. The fanciful names aside, both are borrowed money: a liability that the borrower has to repay the said amount with interest over a period of time, usually from five years or beyond. Both are also unsecured ie, no assets are required to guarantee repayment. This sort of money can either be borrowed publicly or privately each with its own characteristic that can be broadly categorised under cost, level of restriction and standardization.

As their names imply, publicly issued debt instruments like Eurobonds come in a standard format (off the shelf) because they are traded internationally unlike privately placed debt instruments that are custom (bespoke) made agreements between the borrower and one or two large investors. Furthermore, since all bond agreements seek to provide a certain level of comfort for the lender, the borrower is imposed with restrictions that are more stringent in the case of private placements.

This article was originally drafted in November 2007

P.S We are not there yet. Most of the bonds flooding Nigeria’s debt market are government bonds – one year Treasury bills to 20-year FGN bonds. The Debt Management Office (DMO) has latched on and slightly tweaked Prof Akunyili’s re-branding slogan: Good Investor, Good Citizen.

Corporate bonds, financial instruments that allow companies seeking finance bypass banks, disintermediation in financial parlance, are yet to catch up. Some analysts think that banks had too much equity, represented a considerable portion of the equity market and exposed their loan books significantly to the stock market by aggressively giving margin loans. Borrowers used the loans to buy equities and used their own equities as collateral. A boon that bloomed until the market went bust. The new CBN governor says it was a bubble – an equity overweight market, of our making.

There are worries about whether banks will be able to recoup these loans. Though Nigerian banks are adequately capitalised; loans that go sour punch a hole in the soaring profits banks have been accustomed to declaring. The past CBN administration extended a discount window ie, banks swap assets for cash from the apex bank. It was meant to be the application of Walter Bagehot’s principle: “lend freely, at penal rates, against good collateral”, but went awry. It was opaque ie, all sorts of instrumenst were allowed, few banks were privy to it and paid a lower than market interest rate for the cash received. Banks that later got wind of it were invited to the party, but the entry fee was jerked up.

[1] With hindsight Nigerian banks that raised debt were able to better withstand Soludo’s ‘shock- therapy’ ie, naira devaluation, reversion to the Retail Dutch Auction System, seizure of the inter-bank forex  market et al

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