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CBN sets new rules for states’ bond

LAGOS— STATE Governments that have not put in place the fiscal responsibility law may find it difficult to raise funds for development projects from the Capital market.

This is because the financial regulatory authorities have made it mandatory as one of the several conditions states planning to raise funds from the capital market must fulfil.
Equally, the CBN has made it a condition such state bonds must become liquid asset that would make them tradeable and attractive to investors at the stock exchange.

CBN guideline spelling out conditions for conferring liquid asset on state governments’ debt instrument with a maturity greater than one year said: “The issuance of bonds shall be backed by a law enacted by the State Assembly, specifying that a “Sinking Fund” fully funded from the consolidated revenue fund account of the issuer be established.

The state government shall have in place a fiscal responsibility law, with adequate provisions for public debt management, in order to enhance investors’ confidence in the issuer.

Credit rating of state govts

“The state government shall have a credit rating at inception and throughout the tenor of the bonds. The credit rating shall be determined by a rating agency registered or recognised by the Securities and Exchange Commission, SEC. The proceeds of the bond issue shall be strictly disbursed to the projects they were meant for and execution shall be monitored by the SEC.

“In addition, for outstanding bonds, a SEC confirmation shall be required. The issuer shall provide an Irrevocable Standing Payment Order, ISPO; a written mandate given by the State government of a bond to the Accountant General of the Federation, AGF, authorising the AGF to deduct, at source, predetermined sums of money from the statutory allocation of the issuer.

ISPO which shall be payable out of the Statutory Allocation of the state Government and shall be deductible at source.

Approval by state assemblies

“The ISPO shall be approved by the State Assembly. The issuer shall maintain a fully-funded sinking fund; (a fund into which an issuer sets aside money over time, in order to retire its debt instruments) to be managed by a Trustee registered by the SEC. The State Government shall establish a debt management department in order to enhance transparency and the professional management of debt issues.”

The guideline added: “The state government bonds shall be limited to a minimum maturity of seven years to be considered for liquid asset status. The state government bonds shall comply with all the relevant provisions of the Investment and Securities Act (ISA 2007) including amendments thereto as well as SEC’s rules as may be prescribed from time to time.

“State government bonds which meet the criteria for liquid asset status shall be eligible for repurchase or “repo” transactions and the CBN shall open an account with the Central Securities Clearing System, CSCS, Limited to warehouse the securities.

“The collateral provided by counter parties towards the repo shall have a “haircut” applied. This haircut reflects the underlying risk of the collateral. For the purpose of computing the capital adequacy ratios of banks and discount houses, state government bonds with liquid asset status shall be assigned a weight of 20 per cent or as may be prescribed by the CBN from time to time. Banks shall not invest more than ten per cent of shareholders

“To be eligible for liquidity ratio determination, the value of state government bonds in a bank’s portfolio shall not exceed fifty per cent of the value of the bank’s investment in FGN securities. State government bonds granted liquid asset status shall not be included in the computation of the 10 per cent ceiling on lending to all tiers of government as specified in the CBN’s Circular reference BSD/DIR/GEN/CIR/03/011 dated June 26, 2009.

“These guidelines shall apply to both previously issued state government bonds and new issues of state government bonds. State governments seeking liquid asset status for their bonds shall apply to the Director, Financial Policy and Regulation Department, Central Bank of Nigeria, Abuja, through their financial advisers.

The CBN shall regularly publish, on its web site, state government bonds that qualify for liquid asset status. These guidelines shall be reviewed from time to time.”

Long gestation periods

The apex bank said it took the decision because state governments as agents of development are saddled with responsibilities that are sometimes beyond their resources, given the level of economic development in the country.

The recourse to the capital market to fund projects, especially of long gestation periods, should therefore be encouraged as this will not only improve the socio-economic well being of the people but also deepen the capital market.

According to the CBN “It is believed that conferring liquidity status on state government bonds would promote investments in these securities, encourage the regular issuance of the bonds by state governments, stimulate primary and secondary market activities and facilitate the development of the Nigerian capital market.

It is in light of the foregoing that the Central Bank of Nigeria (CBN), on March 2, 2010, decided to confer liquid asset status on eligible state government bonds in accordance with the CBN Act (2007).


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