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Implications of Lagos bond repayment re-scheduling —Cowry Assets

Investors’ liquidity to improve but with re-investment risk

By Peter Egwuatu

BONDHOLDERS may hope for improved liquidity with the proposed Lagos State repayment re-scheduling. Reacting to the plans by Lagos State Government to propose a new repayment schedule for the bond Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said “The reason why the Lagos State Government wants to convert two of its outstanding bonds of N80 billion and N87.5billion, totalling N167.5billion, from bullet payment bonds to amortising bonds is for the state to reduce the interest burden it is bearing on both bonds.

“ The cost to maturity of an amortising bond is significantly lower than that of a bullet payment bond due to the disparity between the bond coupon rates that is interest rates payable on the bond and the return earned from funds set aside in the sinking funds account for the redemption of the bonds. In effect the primary objective of the state in changing the repayment structure of these bonds is to minimise her cost of funds particularly in an interest rate environment where returns on money market instruments, where most of the sinking fund is invested, have crashed while the coupon on the state’s bonds are fixed.”

On the benefit to bondholders, he said “Changing the bonds to amortising bonds would improve the Investors’ liquidity but expose them to re-investment risk from unplanned asset liquidation/repayment given that they are currently very few instruments in the market with similar risk rating and paying equivalent returns.”

It should be noted that Lagos State will ask bondholders next month to agree a change to the payment schedules for N167.5 billion of bonds.

The Lagos State, Vanguard gathered wants to pay interest and principal semi-annually rather than making a single bullet repayment of the principal at maturity.

The meeting will be held on February 23, 2016. The debt in question includes an N80 billion seven-year bond maturing in 2019 and an N87.5 billion to be repaid in 2020. Coupons on the bonds would remain unchanged at 14.5 percent and 13.5 percent respectively.

The State government did not say why it wants to change the payment schedule but analysts said it may be hoping to sell new debt at lower yields to fund infrastructure projects.


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