States Scramble for Funds from Bond Market

CBN Governor, Sanusi Lamido Sanusi

There are indications that as costs of funds in the banking industry remain high, the state governments' appetite for bonds to meet pressing funding needs will remain an attractive alternative.

Speaking on the trend, financial experts explained that the capital market can prove cheaper funds than bank loans and may be the only option for some governments seeking to fill budget gaps or fund big infrastructure projects.

A planned N100 billion ($650 million) bond issue by Rivers State  would take the nation's  total domestic debt stock to more than $2.3 billion compared to South Africa's $1.9 billion in municipal bonds.

Some of the states which have shown increasing interest in the bond market include Lagos which raised N50 billion in a five year-tenor issue in December 2008. The state also issued another N57 billion bond in April 2010 for a 7 year-tenor.

Others on the list include, Imo which raised N18.5 billion, which was issued in June 2009.

Kwara State raised N17 billion in a bond issuance on August 2009 with a 5 year tenor, while Niger State raised a conservative N6 billion through a bond issue on October 2009.

Also, Bayelsa raised N50 billion from a bond issue on June 2010 while Kaduna raised N8.5 billion in an issue in August 2010.

The list also includes Ebonyi, which raised N16.5 billion in September 2010, Edo issued a five year bond for N25 billion while Benue raised N13 billion via a bond issue in June this year.

"Banks in Nigeria have only a small direct exposure to states, about 5-10 percent of their total loans," said Maciek Szymanski, an investment analyst with African Alliance, explaining why states are keen to issue bonds.

Initially, states sought funds for budgets after falling oil prices reduced the amount they received from the Federation Account but they have since sought funding from the bond market for everything from roads to a luxury resort.

State bonds are tax-exempt and all except those of Lagos are backed by a payment order from the central government, which deducts coupon and principal payments from the amounts the states receive from the Federation Account.

"It's virtually impossible that you can have a default unless the sovereign state (Nigerian government) defaults itself," said Samir Gadio, an emerging markets strategist at Standard Bank.

The return on local debt is higher than for sovereign debts, although the lack of a secondary market means there is no yield curve, said Gadio.

Nonetheless, there has been virtually no participation by foreign investors despite the guarantee give by the central government.