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Bonds: Why states are unable to raise funds

By Peter Egwuatu
There are clear indications that only few states were able to access the Nigerian capital market for funds via bonds as only nine states have so far raised N108 billion between 1999 to date.


According to statistics obtained from the Nigerian Stock Exchange (NSE), in the last 11 years, the nine sates that successfully issue bonds between 1999 to 2009 include : Edo (1999) N1billion for housing; Delta (2000) N3.5billion for various projects; Yobe (2001) N2.5 billion for various projects; Ekiti (2002) N4billlion (in 2 tranches of N2.5b in 2002 and N1.5b in 2004) for various projects, Lagos (2002) N15billion for various projects, Cross River (2003) N4billion for Tourism (Obudu Ranch), Akwa Ibom (2004) N6billon for various projects, Kebbi (2006) N3.5 billion for State University and an Irrigation Project, Lagos (2009) N50 billion first tranche of a N275 billion infrastructural Projects;  Imo (2009) N18.5billion bond issue is Series 1 of a N40billion Medium Term bond issuance programme.

Vanguard reliably gathered from a source close to the Securities and Exchange Commission (SEC), that the major reason why states have not been able to access the market for long term fund(bond) was their inability to tidy up their financial statements which is part of the conditions that must be fulfilled before approval is granted to them by the Commission.

According to the source, “ This is a major factor inhibiting the states government from accessing funds from the capital market. Most of the states government don’t have financial statement that shows how their states are run financially.

State that wants to issue bonds must have at least three years financial summary of its activities. This is to ensure that the state issuing the bonds becomes responsible and accountable and investors are satisfied with its performance.

“Other factors adduced why state government finds it difficult to raise funds via bonds from the Nigerian capital market include over dependance of federal allocation, legislative bottlenecks among others” the source added.

Meanwhile, some state governors that appeared to be in a race to issue bonds from the capital market include: Ogun, Bauchi, Kano, Niger and Kwara states. These states, last year, expressed preparedness to hit the capital market with bonds issuance so as to fund cash soaking long-term infrastructure schemes.

However, there have been apprehension that some of the states that have indicated interest may not meet all the requirements to be able to realise the deal.

On the rules of raising money via bonds from the capital marker , spoke’s person of SEC, Mr. Lanre t Oloyi told Vanguard  “there are rules on the issuing of bonds by the SEC.Some of these rules include the submission of the state’s audited accounts for the preceding three to five years; a favourable credit rating report, a feasibility report and an Irrevocable Standing Payment Order (ISPO).

He explained that “an ISPO means that the fixed bond repayment is deducted by the FGN from state’s allocation before the net amount is released to the State

“The deducted amount is paid directly into the trustees account by the apex government on a monthly basis. The state therefore has no say in repayment once the ISPO is in effect so investors have strong guarantees that they will get their returns.”

It would be recalled last year , Governor Gbenga Daniel of Ogun State visited the floor of the NSE to hint about his plans to raise funds for the state through bond issue, although the governor did not publicly specify the amount the state wants to raise during the visit. But indication show that the figure may hover between N40and N50 billion.

Meanwhile, indications have emerged that the state is finding it difficult to access the needed funds due to non approval from the State House of Assembly.

Governor, Daniel when contacted on the issue said, the state has been taking steps towards bond issuance over the years even as he brushed aside the rumour that the state’s account is in tartars and that the state could not provide audited accounts.

“I heard that people say we do not know the true state of our account when the report was actually submitted in black  and white by the Audited General and published in national dailies in March 2009.

Governor Daniel further revealed that his administration had complied and submitted, to the state House of Assembly, a five year report of Ogun State account.

However, SEC has continuously expressed that it will not compromise its rules on state bond as its  mandate is to protect investors’ interest.

Senator Udoma Udo Udoma, Chairman of the SEC in a statement  made it clear that “Our business is to actually make sure that we encourage people to float bonds”.

“One thing we will not do is clear. We will not bend our rules or any requirement. The report of our committee on capital systems and processes emphasized that we expand the market; we cannot depend on the equity market alone, we must, as a matter of priority, look into the development of the bond market.

On the growing interest of states in bond issuance, Senator Udoma admonished the states that are approaching the market to always ensure that they meet all the requirements needed before their bonds can be approved by the SEC’s board.
“We don’t look at anybody’s face. We don’t look at where you are from; we simply look at our rules. If you meet the rules and the requirements, the approval is a certainty.

Vanguard gathered that some of the states who feel they can not meet the requirements for the issuance of bonds are currently lobbying to see if SEC could avert some of the rules.

According to a source, “ Some states are mounting pressure on SEC to see it they can get approval so as to allow them avert some of the rules. But SEC is still insisting that they should engage professionls to help them prepare statement of accounts. Even when they scale through they still need to get approval from the federal government that will issue them ISPO.”

The source revealed that the ISPO was one the reasons why the Ogun and Abia states could not access funds from the capital market.

According to him, “ The then President Olusegun Obasanjo refused to issue the ISPO to the Abia State during the administration of Governor Kalu Orji Uzor even when the states had prepared its audited financial statement.
However, other factor stakeholders said should be addressed to attract states to raise bond is the cost of raising the funds.

However, other factor stakeholders said should be addressed to attract states to raise bond is the high cost of raising the funds.  According to them, “ If the cost of issuing bond from the capital market is reduced it would go a long way to attract states to raise funds from the capital market”

Though the NSE recently heeded stakeholders call to reduce the transactions cost of bond issuance as it  reduced transaction charges at the Over-The-Counter bond market to encourage divestment of portfolios in the sub-sector.

The development coincided with plans by some investors to seek alternative routes to getting stable and better yields, after suffering from price losses arising from illiquidity and confidence crisis in the equities sector.

The NSE in a statement made available to Vanguard , stated that henceforth, annual listing cost of new issues of Federal Government bonds in the primary market will attract a cost fixed at N20 million irrespective of the number of bonds listed by the Debt Management Office (DMO) of the Federal Government.

For transactions that will be done on daily basis at the secondary market, the NSE is charging N1 per million of the underlying traded (charged on sell side only), while the Central Securities Clearing System (CSCS) charges N1 per million of the underlying traded (charged on both buy & sell sides). For the FGN bonds, stockbrokers’ charge N5 per million of the underlying traded (charged on both buy & sell sides).

On the other hand, yearly listing fees of new issues of State Government/Local Government (Municipal) and Corporate Bonds in the primary market remains on a sliding scale with no changes, ranging from a minimum of N189,000 for issues less than N50 million, to a maximum of N4.2million for issues more than N200 billion. For its application levy, the NSE is charging 0.15 per cent for issues up to N2 billion and 0.1 per cent for issues above N2 billion, while the CSCS will now charge 0.0125 per cent on new issues.

Furthermore, transactions at the secondary market will now attract N5 per million of the underlying traded (charged on sell side only), while both the CSCS and stockbrokers will charge N10 per million of the underlying traded (charged on both buy & sell sides). Before then, the fees charged on traded bonds vary among the stakeholders between 0.47 per cent of consideration


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.