How To Invest In Corporate Bonds in Nigeria With These Tips

Last Updated on January 29, 2021 by Ope Quadri

Do you want to make extra money in Nigeria? Investing in bonds is one of the lucrative ways you need to consider if you want to have multiple sources of income.

In this post, we’ll tell you six hottest reasons you should put your money on bonds and the right people to talk to.

Invest In Corporate Bonds in Nigeria

For those who want to know if investing in corporate bonds is a good idea, it’s very important to know what this type of investment is all about.

So…

What are Corporate Bonds?

Simply put, Corporate Bonds are debt instruments issued by corporate organizations as well as public establishments.

Whereas corporate organizations here refer to private sector companies, public establishments are those organizations owned by the government created to function as businesses and generate profits.

As the privatization of public sector institutions in Nigeria continues to experience an increase over time, the number of public corporations in Nigeria has continued to decrease.

Presently, the prominent public corporations are the Nigerian Ports Authority (NPA), Federal Radio Corporation of Nigeria (FRCN), Nigerian National Petroleum Corporation (NNPC), and the Nigerian Television Authority (NTA), etc.

Blue Chip enterprises issue bonds to borrow money on a long term basis. The Earnings from bond issue is mostly used to restructure an organization’s balance sheet in order to be able to fund public infrastructures or long term projects.

Types of bonds in Nigeria

  • FGN Bonds​
  • FGN Promissory Notes
  • FGN Eurobonds
  • FGN Diaspora Bond
  • FGN Savings Bonds
  • Sub-national Bonds
  • Sukuk
  • Agency Bonds
  • Supranational Bonds
  • Corporate Bonds
  • Green Bonds

However, the Nigeria Stock Exchange (NSE) highlights the list of corporate bonds in Nigeria on its official portal which is updated regularly.

There has been quite a lot of interest in the Nigerian corporate bonds market, unfortunately, when considering investment options, most retail investors (not limited to Nigerian investors alone) hardly considers corporate bonds.

It is important to note that corporate bond is a distinct investment tool is which entails a level of technicality that may not be accessible to everyone.

Therefore, the main targets for organizations that issue bonds are usually institutional investors like pension funds, insurance companies, and asset managers.

Usually, the technical units of these institutional investors are equipped with qualified analysts who are tasked with making researches on investment instruments and offering recommendations.

However, retail investors who are knowledgeable in the business can build long term wealth by taking advantage of the eye-catching profits that come with investing in corporate bonds.

How Do Corporate Bonds Work?

Just like the FGN Bonds, corporate bonds work the same way except that the risk involved is higher.

Investors buy bonds issued by companies because they believe the organizations are reliable enough to meet its requirements and in a timely manner too.

Normally, the assets and cash flow of the issuing company are what protects the corporate bonds.

Before companies issue bond, they must have gone through a rating process by an approved and renowned rating agency.

The rating gives a level of assurance that the company can be reliable, will able to carry out its responsibilities, has thorough corporate governance, and has attained a degree of stability.

Also, the coupon rates offered by corporate bonds are usually higher than Sovereign bonds and are payable on a monthly, quarterly or yearly basis through to its maturity when the capital investment is redeemed.

There is a readily available secondary market for corporate bonds which enable investors to trade it whenever they want without having to wait till maturity, this is why they are known to be very liquid.

From the investor’s viewpoint, corporate bonds may be a less risky compared to stocks because should the issuing company’s business collapse and the company becomes bankrupt, bonds holders are creditors and are eligible to be paid after legal requirements in line with bankruptcy laws; but in this case, ordinary shareholders would lose all their investments.

Major differences between ordinary shares and corporate bonds:

1) Ordinary Shares signifies ownership right on the company, whereas bond represents a creditor’s entitlement on the company.

2) In bond, returns and repayment (cash flow) are predictable. From the onset, a bondholder knows the interest on his investment (coupon rate) and the possible payment period including his principal amount.

While for ordinary shares, payment of the dividend is not assured because it hinges on the likelihood of the company making a turnover.

3) Also, the profitability of the company and market forces are strong determinant factors and because of this, the value of the ordinary share investment is unpredictable at any point in time particularly if shares are quoted.

4) The bond may be issued as callable, this means that the issuer may recall the bond and discharge its obligations before maturity.  Ordinary shares are not recallable.

A Brief History of Corporate Bonds Issuance in Nigeria

The then Broadcasting Corporation of Nigeria (BCN) issued a ₤210,000 3-year bond in 1960 maturing in 1963. It was during that period that The Nigerian corporate bond market was launched in 1960 precisely.

Regrettably, the break out of the civil war stalled what was then becoming a lively corporate debt market. By the end of the civil war in July 1970, the Nigeria corporate bond market struggled to stay afloat.

In the rest of the period of the 1970s, there was only one issue by the Nigerian Sugar Company, 12 issues in the eighties, 31 in the nineties.

There has been more like a rebirth in the corporate bond market as blue-chip companies and some well-run local businesses rely on the debt market to generate long term capital to refinance or take up long term projects. Data from the FMDQ indicates that the corporate bond market is worth over N300 billion.

And as at the point of making this report, there are not less than 30 corporate bonds listed on the FMDQ OTC platform with some set to mature as far as 2030.

A few of the companies that have issued bonds including but not limited to Lacasera, UBA, Dana Group, Forte Oil, NBL, Tower Fund, Lafarge Africa, NAHCO, FCMB, Stanbic IBTC, Dufil, C&I Leasing.

Most recently, Lapo MFB (one of the Microfinance banks in Nigeria) issued a 5-year bond at N3.5 billion at a coupon rate of 17.5%.

Factors Influencing interest in Corporate Bonds

Firstly, Nigeria commenced a restructuring of the corporate debt market which offers companies some incentives, a reduction in transaction fees and enables them to issue bonds at lesser coupon rates while in the same vein providing for tax-free returns to investors.

These reforms basically removed the restrictions around the corporate debt market and aid in stimulating the interest of organizations to access that section of the debt capital market.

Presently, there is a structure for price discovery and standard for valuation purposes which makes it easy for institutional investors to accommodate corporate bonds in their portfolios.

Secondly is the decreasing yield environment in the money market. For instance, treasury bills which usually offers as high as 23% in 2017, now stops at 15%.

Moreover, there is the possibility that rates will continue to decrease as the government continues with its program of refinancing local debt with foreign debt.

As campaigns for general elections in 2019 continues to increase in the year, political expenditures will equally increase liquidity and taper yields.

Yet another driving force is the fact that yields on independent bonds are also decreasing for reasons such as the ones emphasized above and the capital market which normally would have been the recipient of the decreasing yield environment in the money market is in a bearish mode.

Hence, portfolio investors such as insurance companies, pension funds, and mutual funds are depending on corporate bonds for higher returns.

Moreover, corporate bonds are progressively becoming an economical substitute to bank loans and as long as the questions surrounding high-interest rates in Nigeria persist, business organizations will continue to see the corporate bonds market as an alternative source of capital.

Why You Should Consider Investing in Corporate Bonds

Despite the factors driven by market forces stressed in the paragraphs above, investment in corporate bonds has some benefits. They are:

  • High return on investment (ROI).  Some corporate bonds are issued at coupon rates up to 20% per annum.
  • Cash flow/income from bonds are usually stable and predictable over a period of time.
  • When compared to sovereign bonds, corporate bonds offer more attractive yields.
  • Returns from corporate bonds are usually higher than fixed Deposit with banks.
  • There is a strong secondary market for corporate bonds which makes it easier for investors to exit.
  • Ratings from issuers make it easy for investors to measure the relative safety of corporate bonds – the higher the rating, the safer it is.

How to Invest Corporate Bonds

Investing in Corporate Bonds is quite easy. All you need to do is simply contact your bank or stockbroker for assistance.

Your broker or bank will inform you of what corporate bonds are being traded, outstanding maturity period and coupon rates.

You can have access to the FMDQ website for a list of presently traded corporate bonds. And if you are interested in investing in primary issues your bank will also let you know what new bonds are on offer.

Normally, when you purchase bonds it is settled through a depository. In Nigeria, the Central Securities Clearing Systems (CSCS) is the depository. What this means is that you will have to open an account with the CSCS to trade in bonds in Nigeria.

People you should talk to before investing in bonds

  • stockbroker,
  • banker,
  • accountant,
  • lawyer
  • professional investment adviser.

Final thought:

We urge you to carry out your due diligence before investing in corporate bonds, that’s why it is advised to talk to any of the aforementioned professionals in the industry.

Leave a Comment

Your email address will not be published. Required fields are marked *

JOIN OUR NEWSLETTER
And get notified everytime we publish a new blog post.