A Unique Investment Opportunity
The proposed Federal Government Savings Bond to be issued by the Debt Management Office next week is an investment opportunity for retail investors who want steady returns on their investment, writes Goddy Egene
Since the stock market crash of 2008 and 2009 investor confidence has remained weak. Many investors, especially, retail investors are skeptical about investing more money in the capital market due to the losses they suffered in the past. The low patronage has made the market indicators to remain below their 2007 peaks.
Also, most institutional and high networth investors have shifted their attention from equities market to fixed income securities where there are sure of steady returns or capital preservation. They patronise federal and state governments’ bonds that give regular returns. Unfortunately, retail investors, who would have loved to patronise the fixed income market as well, have not been able to do so because of the high amount required to invest in bonds.
However, a great opportunity for retail investors to enjoy significantly regular returns by investing in federal government securities is around the corner. That opportunity is coming through the plan by the Debt Management Office (DMO) to float the first Federal Government of Nigeria(FGN) Savings Bond next week.
Understanding the saving bond
FGN Savings Bond, a bond being issued by DMO on behalf of federal government, is part of the government programme targeted at the lower income earners to encourage savings and also earn more income (interest) when compared to their savings accounts with banks.
FGN Bonds are debt securities (liabilities) of the FGN backed by the ‘full faith and credit’ of the federal government and no default risk. This means that it is a safe investment where interests will be paid at regular period and principal repaid at maturity. The offer for subscription will open on Monday, March 13, 2017 and run for 5 days.
Features/benefits
The bond will be denominated in Naira with a minimum subscription of N5,000 and a maximum of N50 million. It has a fixed interest rate that will be paid every quarterly and has a tenor of two to three years.
The purpose of the bond is to deepen the national savings culture. It is aimed at providing opportunity to all citizens, irrespective of income level, to contribute to national development. It will enable all citizens participate in and benefits from favourable returns available in the capital market and diversify funding sources of the FGN.
The savings bond has the following benefits: It offers guaranteed returns, and encourages financial inclusion among low income households; it enables individuals to enjoy those benefits which accrue to high net-worth investors in the capital market; it has a competitive fixed rate – interest rate; the interest incomes earned from the securities are tax exempt; and the FGN savings bond certificate can be used as collateral for loan.
DMO explains
The Director General of DMO, Dr. Abraham Nwankwo had explained that the floating of FGN Savings Bond was to encourage the public, especially low income earners to save, invest and earn commensurate returns on their investments.
He said the new instrument was part of the strategic plans for 2013-2017 with the objective to deepen and broaden federal government’s securities market in order to sustain the development of other segments of the bond market.
According to him, savings bond would provide an opportunity for Nigerians across all income segments to invest in bonds.
He disclosed that bond would be announced by the DMO on the first working day of every month or as may be determined by the organisation from time to time.
Nwankwo said: “The rationale for the issuance of FGN Savings Bond are to deepen the national savings culture, diversify funding sources for the government and establish a benchmark for other issuers of bonds in the country. It offers guaranteed returns, helps to stimulate and deepen the savings culture among households and encourage financial inclusion. It enables individuals to enjoy those benefits which accrue to big investors in the capital market. Savings bond also helps to increase access to funds available for investment in the economy, thereby floating gross capital formation and increase in output within an economy.
“Investors can subscribe through the over 100 stockbroking firms trading on the floor of the Nigerian Stock Exchange (NSE) and accredited by the DMO to act as distribution agents. Every month, subscription shall open same day the price is announced and investors will have five working days to put in their subscription through the distribution agents.”
Retail investors excited
Some retail investors, who spoke on the planned savings bond, expressed excitement, saying it is a very good development for investors, the government and market in general.
For instance, Mr. Moses Igbrude of Independent Shareholders Association of Nigeria (ISAN) told THISDAY that DMO should be commended for finally “democratising” the bond market.
“Since the equities market has remained volatile retail investors like us have been looking for alternative investments. The FGN savings bond is, therefore, a welcome development. The bond market has been an exclusive of high networth investors. Although the DMO made moves in the past to encourage secondary trading of bonds so that low income earners can benefit, that has not really worked out well. However, with the savings bond, many investors will now have the opportunity to participate and benefit from regular interest rates from a government security,” he said.
Igbrude said the N5,000 minimum investment is highly encouraging and will make the offer very attractive to retail investors.
Another investor, Mr. Justin Ekere said the beauty of the security is that you are at risk of losing your capital.
“Unlike some investments that risk losing your capital, the savings bond is a less risky investment. Apart from the interest that you will earn every quarter, your capital is preserved and you get it back at the end of the tenor. This is highly heart-warming and encouraging. The DMO has done well by introducing this instrument into the market at this time,” Ekere said.
DMO commended
The DMO recently got commendation from stakeholders for successfully raising $1 billion for the federal government at the international capital markets. The Chief Executive Officer of Stanbic IBTC Holdings Plc, Mr. Yinka Sanni said: “We wish to first and foremost congratulate the FGN, as this is indeed a testament to international investor confidence in Nigeria’s roadmap towards economic recovery and growth. We equally wish to congratulate the Federal Ministry of Finance team, led by the Honourable Minister of Finance (Mrs. Kemi Adeosun), for a job very well done on this highly successful return to the international capital markets. The overwhelming success of the transaction on the whole evidences the underlying potential of Nigeria, and Stanbic IBTC Capital Limited is indeed proud to be part of this transaction. We are also pleased to sponsor the quotation of this Eurobond on FMDQ’s platform.”
The DMO was also hailed for listing the Eurobond on the domestic securities exchanges after listing on the London Stock Exchange (LSE).
The Chairman of FMDQ Securities Exchange, Dr. (Mrs.) Sarah Alade , who spoke through the vice chairman of FMDQ, Mr. Jibril Aku, congratulated the issuer on this epochal step, noting that this move by the FGN to list on a domestic exchange, in addition to listing offshore was a welcome development, and a stance which would rightly position the nation to maximise its potential via the debt capital market.
“In line with “FMDQ’s vision for the transformation of the markets, the OTC Exchange, since its debut onto the Nigerian financial markets landscape, already granted permitted trading status for $1.50 billion of the previously issued FGN Eurobonds and $3.15 billion of Eurobonds issued by Nigerian companies, ensuring price formation and providing information transparency to protect investors interests,” she said.
Speaking at the listing of the Eurobond on the Nigerian Stock Exchange (NSE), Executive Director, Operations and Technology, NSE, Mr. Ade Bajomo said the event marked the first listing of a sovereign dollar denominated instrument in the Nigerian capital market.
“It is a testament of the Federal Government’s and DMO’s commitment to the growth and enhancing the depth of the Nigerian capital market. As an FX denominated instrument, the Eurobond will trade and settle in its currency of issuance (USD), thus setting the foundation for multicurrency capital raising and trading in the domestic market. This will open up hybrid capital raising options and create additional portfolio diversification opportunities for investors,” he said.
He congratulated the management of the DMO on the remarkable success of this first Eurobond issuance since 2013, which was 780 per cent oversubscribed - with investors cutting across hedge funds, pension funds, insurance companies, banks and other institutional investors.
Bajomo called on all stakeholders to take advantage of the vast opportunities by partaking in and contributing to the growth of the markets through product innovations that meets strategic investors’ needs and appetite.
Nwankwo said the transaction was the longest tenored debt security (15 years), issued by the FGN in the international capital markets.
“The transaction also marked the first outing by the FGN since 2013, and the first issued by a sovereign from Sub-Saharan Africa in 2017,” he said. While emphasising the nation’s recognition that the wide infrastructural gap, which constrains the development efforts of the nation, could be better matched by tapping into long-term financing options, via domestic and foreign debt capital markets, Nwankwo underscored the confidence of the international markets in the potential of Nigeria’s economic development as evidenced by the over-subscription in the Eurobond.