Alternative Source of Funding for Corporate Issuers Through the - PowerPoint PPT Presentation

Alternative Source of Funding for Corporate Issuers Through the Nigerian Debt Capital Markets October 2018

Outline Overview of the Nigerian Debt Capital Markets 2. Available Financing Options in the Nigerian 3. Debt Capital Markets for Corporates Financing Options: Bonds vs Bank Loans 4. Bonds Issuance Process 5. Possible Bonds Structure 7. Commercial Papers 8. 9. Short Term Bonds Registration and Listings Private Companies’ Bonds (PCB) Noting 10. Transaction Case Study 11. 1

Overview of the Nigerian Debt Capital Markets Description Value (N'bn) %age Description Value (N'bn) FGN/FGN Savings 8,213.21 92.15% Total Bonds 8,912.41 Sub-nationals 396.95 4.45% Commercial Papers 210.96 Corporates 288.70 3.24% Treasury Bills 2,701.84 Supra-nationals 8.09 0.09% Omo Bills 9,976.59 Sukuk 5.46 0.06% Total Bonds 8,912.41 100.00% Total Local Debt 21,801.80 ▪ The primary market for corporate bonds in ▪ The total outstanding value of domestic debt in the Nigeria is still in its nascent stage, gradually Nigerian DCM as at October, 2018 stands at gaining awareness amongst corporates to N21.80trn (c. US$60.06mm) match long-term financing requirements with long-term funds Size of the Total Bonds Market FGN Yield Curve (%) 3.24% 0.09% 0.06% 4.45% 15.5 15.17 15.13 15.07 15 14.97 14.5 14 13.93 13.5 92.15% 13.13 13 12.75 12.5 12 FGN/FGN Savings Sub-nationals Corporates Supra-nationals Sukuk 11.5 3m 6m 12m 2 Years 5 Years 10 Years 20 Years Source: FMDQ Daily Quotation List as at Oct 9, 2018 Source: FMDQ Daily Quotation List as at Oct. 9, 2018 2

Available Financing Options in the Nigerian Debt Capital Markets for Corporates The Nigerian DCM provides a bouquet of funding options to Corporates to meet various financing requirements ▪ Usually between ▪ Debt One (1)- three securities (3) years tenor issued by ▪ Serves to corporates shorten time to with maturities market above three Corporate (3) years Short-Term Bonds Bonds Debt Capital Products ▪ Short-term Commercial financing securities Papers ▪ Maturities ▪ Debt usually securities between 90- Private 27 days issued by Companies ▪ 5-business private Bonds days turn- companies, around time and noted on for registration FMDQ on FMDQ 3

Financing Options: Bonds vs Bank Loans ▪ An interest-bearing debt security issued by corporates, governments and government agencies for the financing of infrastructure or for expansion purposes Description ▪ Involves a promise to make periodic stream of payment of principal and interest to the investors ▪ An IOU for a fixed amount ▪ Usually has a redemption/ maturity date ▪ Negotiable instrument, i.e. can be transferred to a third party either through sale at the exchange or through a General Bonds nominal transfer to a blood relation Features ▪ Has a market price which may be different from its face value ▪ The interest payment is usually twice in a year ▪ Financing of capital projects with long gestation period ▪ For re-establishing a more rational strategy for financing the local currency portion of government budget deficits Broad and other long – term programs Uses ▪ To reduce local and external debt stocks. By issuing bonds the proportion of treasury bills in government debt profile is reduced 4

Financing Options: Bonds vs Bank Loans../2 COST OF ISSUE (Bonds) Criteria Bonds Bank Credit SEC 0.15% Tenor Long Short FMDQ/NSE 0.15% Parties to the Issue Cheaper Expensive Financing Cost Issuing House 1.35% Various structures Usually Floating CSCS 0.01% available (fixed, Interest Rates with benchmark Receiving Agent 0.75% callable, zero rates Stockbroker 0.13% coupon, etc) Solicitors to the Issue 0.10% Periodic interest at Monthly Ease of Cashflow Solicitors to the Company 0.05% designated intervals repayment Less stringent Stringent Reporting Accountant 0.10% Restrictions covenants covenants Auditors 0.05% Trustees 0.35% Emergence of the Does not support Supports long- Basel III long tenored Underwriting *2.30% tenored instruments credits Regulation Printing et al *0.02% Financial Advisory Diversity of High Low Registrars Investors Rating Agency Receivables can be Too complex Placement Agents Securitisation tied to a pool of structure for underlying assets most bank loans Maximum cost of issue for a bond is 2.23% of * Highlighted content indicates SEC’s proposed fee as these fees are not capped currently the gross total proceeds 5

Bond Issuance Process High Level Transaction Flow Process Regulatory Marketing/ Capital Raise/ Preparation Stage Structuring Stage Engagement Financial Close Activities Compilation of Prospectus Documentation Launch/ Accounting/ Drafting Marketing/ gathering Settlement/ Financial & Regulatory Underwriting and due diligence Close Documents approvals ▪ ▪ Drafting of Audit of financials ▪ Investment case ▪ Offer launch ▪ Documentation ▪ ▪ Allocation and Review and report Prospectus and gathering Teaser settlement ▪ Legal due diligence on 5 years historical other offer ▪ Investor Deliverables ▪ Remittance of ▪ Rating audited financials documents presentations proceeds ▪ Legal opinions ▪ ▪ Regulatory ▪ Commence book- Review and report on ▪ Listing ▪ Drafting Vending building ▪ financial forecasts applications Commencement of Agreements ▪ Investor Road shows Secondary market ▪ ▪ Review financial Manage ▪ Trust Deed trading ▪ Conclude book disclosure & offering communication Preparation ▪ Transaction close building documents with regulators ▪ Appoint other Post Compliance ▪ professional parties SEC and FMDQ ▪ File Quarterly Returns to the SEC approvals Participants Participants Participants Participants Participants ▪ ▪ ▪ ▪ ▪ Issuer Issuing House Issuer Issuer Issuing House ▪ ▪ ▪ FMDQ ▪ ▪ Issuing House Issuing House Auditor Legal counsels ▪ ▪ ▪ ▪ FMDQ Receiving agents Trustees Reporting ▪ ▪ Legal counsels Accountants ▪ Issuing House 6

Possible Bond Structures Nigerian investors are open to a variety of structured Accessing the Domestic Bonds Key Considerations in Accessing products and plain vanilla bonds, therefore potential the Bond Market issuers can explore a multitude of various possibilities: ▪ Tenor of the Bond ▪ Credit Rating ▪ Financials Split- Market ▪ Coupon Timing Bonds ▪ Credit Enhancement ▪ Callable Puttable Favorable Market Conditions Bonds Bonds ▪ Coupon Rate ▪ Investor Base ▪ Tax Exemption Incentive Floating Zero- Bond Rate Structures Transaction Parties Notes Coupon with caps Bonds ▪ Issuing House(s) and floors ▪ Trustees ▪ Solicitors ▪ Rating Agency ▪ Reporting Accountants Inflation ▪ Broker (Listing Agent) Amortising Fixed Linked ▪ Bonds Registrars Rate Bonds ▪ Account Bank/ Paying Agent Bonds ▪ Underwriters ▪ Receiving Bank 7

Commercial Papers Issuance Process Benefits Parties Funding Source for Working Capital & ▪ Issuing Placing, Paying Initiation & Seasonal Needs; Bridge Financing & Calculating Agent Documentation (IPCA) or Issuing & Placing Agent (IPA) – Diversification of Funding Sources i.e. Dealers & Arrangers; Collecting & Funding Source Stability (Pension Paying Agent (where Offer Period Assets can be invested in CP) not Sponsored by IPCA) ▪ FMDQ Registration Cheaper Source of Funding to Bank Credits Member (Quotations) Settlement ▪ Registrar Opportunity to Serve as National Corporate Benchmark Financial Close ▪ Solicitors Cashflow Optimisation ▪ Auditors ▪ The total cost of ▪ Underwriter (not issue is between Flexibility mandatory) 2.5 to 5% of gross issue proceeds ▪ Guarantor or Back-Stop Absence of Restrictive ▪ Typically takes Facility Provider (not Covenants/Collateral about 4-6weeks mandatory) 8

Short Term Bonds Registration and Listings Tenor (years) < 1 1 2 3 > 3 Short-Term Bonds Medium to Long-Term Bonds Commercial Papers Short-Term Bonds ▪ Short-Term Bonds (STBs) are short-term debt instruments issued by corporate entities with tenors between one (1) year and three (3) years ▪ Enable issuers bridge the funding gap between short and medium to long-term debt instruments ▪ Provide issuers alternative and competitive funding source whilst serving the liquidity needs of corporates ▪ Issuers stand to enjoy quicker time-to-market as FMDQ will serve as the SEC- approved securities exchange for the primary due diligence for all STB issuances 9

Private Companies’ Bonds (PCB) Noting The FMDQ PCB Noting Service provides a robust and efficient platform through which private companies wishing to access the debt capital markets for long-term funding via bond issuances can benefit. PCBs shall be issued in the private market via private placements, whilst trading will occur bilaterally. The PCB Noting Service restricts the availability of key financial information and activities of private companies noted on FMDQ to only qualified counterparties, via a restricted portal. Private companies with bonds noted on FMDQ will benefit immensely from an efficient noting process and access to a broad qualified institutional investor base, in addition to building a capital market debt raising track record. 10