The plans by the Asset Management Corporation of Nigeria (AMCON) to refinance its N1.7 trillion three-year bond with maturities of between 7 and 10 years, when the debt expires next year, will boost banks’ liquidity and test the depth of the domestic bond market, according to analysts.
“The redemption of the AMCON bonds should have a positive impact on the books of the banks. They are zero coupon bonds and the banks have been accruing the unearned income from these bonds on their books since they took position on this security,” stated Kayode Tinuoye, head of research, Afrinvest West Africa.
“However, I think the capacity of the market to absorb the potential N1.7 trillion refinancing issue is very unlikely and will remain a key development to watch,” Tinuoye added.
Mustapha Chike-Obi, CEO, AMCON, said in an interview last week that AMCON had launched a roadshow in Lagos to meet investors, and will make trips to New York, Boston and London next month to invite foreign investors to buy into the new debt.
Refinancing an existing debt obligation refers to a process whereby the issuer revises the schedule for debt repayment and in the process replaces an older loan with a new loan offering better terms.
The bonds to be refinanced by AMCON include those issued for the non-performing loan purchases (NPL), as well as those issued by the corporation for cash (the price discovery bonds).
“It is important for AMCON to show its ability to refinance the issued bonds to the market early enough, which could alleviate the worries of a number of the treasury holders and also potential buyers about the duration/liquidity risks the instrument could hold,” noted Adesoji Solanke, Renaissance Capital’s (Rencap) sub-Saharan bank, analyst.
The new bonds to be issued (after the refinancing) will be coupon bearing, which will be properly priced by the market at prevailling levels, as opposed to the modalities used in pricing the 2011 discounted bond issuance.
After refinancing, banks can either swap the AMCON bonds they presently carry on their balance sheet with cash or with the new AMCON bond.
Access Bank plc, which reported a 72 percent full-year (FY) 2011 liquidity ratio, maybe one of the merged banks to benefit from the refinancing, since 61 percent of its liquid assets are investment securities of which more than 85 percent are held to maturity (HTM), and the bulk (90 percent) of what is HTM are AMCON’s bonds.
Thus, while the liquidity pressures may not be apparent today, as the merged banks grow over time, they will be more pressured than their peers to raise deposits or some other funding types to support their asset growth, which the liquidity provided by the AMCON refinancing can help alleviate.
Meristem Securities analyst, Abiodun Keripe, believes the likely positive impact of the refinancing will be dual faceted, noting that “the decision of banks to swap for either cash or new AMCON bond at maturity would be dependent on the alternative returns and risk. The upside remains that banks would have access to more liquidity at maturity; the downside could be the inability of AMCON to fully refinance the bonds.”
The size of Nigeria’s domestic bond market is currently N5.6 trillion ($35.9 billion), according to data from Dunn Loren Merrifield, an investment firm.
“Nigeria’s ability to finance itself domestically in its relatively well developed domestic capital market is a major strength compared to many new investments grade sovereigns,” stated Fitch Rating Agency, in a report released this week.
AMCON’s ability to refinance its N1.7 trillion bonds, 30.3 percent of outstanding domestic debt issuance (in a fell swoop), will test the above thesis.