By Babajide Komolafe
The N1.7 trillion bonds issued by the Asset Management Corporation of Nigeria(AMCON) in exchange for bad loans of banks have become a source of trading for cash (arbitrage) at the interbank market.
Vanguard investigation revealed that while some banks with liquidity challenges, mostly the rescued banks, trade the bonds for liquidity relief, others are using it for future cash gains (arbitrage).
Among other things, banks are allowed to sell up to 25 per cent of the bonds to the Central Bank of Nigeria (CBN) on repurchase (repo) basis for 90 days to raise funds for liquidity relief.
A repurchase agreement, also known as a repo, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price is usually higher than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender while the original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed interest rate.
In this instance, the banks are the original sellers hence borrowers while the CBN is the buyer and hence the lender. Investigation further revealed that the banks started taking advantage of this provision two weeks ago when interbank rates began to rise in response to the persistent scarcity of funds.
“With interbank rates rising to double digits, the banks decided to test the repo provision of the AMCON bond to see if it was a better option to borrowing from the interbank market,” a money market source told Vanguard.
“It turns out that the interest rate or “repo rate” charged by the CBN was lower than what is obtainable at the interbank, so they embraced it to ameliorate their liquidity situation,” the source added.
“The repo provision of the AMCON bond has brought improved condition of the market. The rescued banks need it to address their liquidity issues but in the process, they have created another source of liquidity for the market,” a senior bond dealer told Vanguard last week. “That is why the rates have moderated down,” he added. A review of interbank rates showed that rates have taken a significant downturn at a time when they should be on the upward trend.
On Friday, May 6th, interbank rates (rate at which banks lend to each other) fell by more than 200 basis points on the average to single digits. From 11.04 per cent, Call money fell to 8.38 per cent, while 7 Days money and 30 Days money fell to 9.21 and 10.53 per cent from 11.54 and 12.33 per cent respectively. Seeing the success achieved by the rescued banks in using the bonds to raise cheaper money, other banks without liquidity challenges, followed suit. “Most of them saw the opening as opportunity for arbitrage, and that is what they use it for. They get cheap funds through the bonds and invest the funds in instruments with higher returns’, a money market source explained.
“To them, it is better to use the bonds to make some money no matter how small instead of allowing the bonds to lie idle in their books. Moreso that they believed that is what the bond is meant for, which is to inject liquidity into banks so that they can have funds to invest or lend to the economy,” the source added.
Investigation also revealed that the CBN seems to be favourably disposed to this development and may have waived the 25 per cent ceiling on the repo provision. The provision, according to money market operators have become another source of income for the apex bank. The repo rate charged by the CBN is a major income source, so it is good for them that the banks are using the bonds to raise money.
AMCON was established to take over the non-performing loans of banks, and by so doing, boost the liquidity and capital positions of the banks so that they can resume lending to economic activities.
To achieve this, the company issued N1.7 trillion worth of bonds which it used to exchange for the non-performing loans in the banks.