Coronavirus (Covid-19) pandemic or not, it was business as usual for the Federal Government of Nigeria (FGN) when the Debt Management Office (DMO) of the Ministry of Finance went to the market on 21 May 2020 to issue its latest offering – a N150bn (US$386m) Sukuk Ijara with a tenor of 7 years.
“The proceeds from the issuance,” according to the DMO, “will be used solely for the construction and rehabilitation of key roads across the six geopolitical zones of the country.”
Nigeria last went to the market in December 2018 when it raised N100bn through a similar 7-Year Sukuk Ijara issuance also linked to construction and rehabilitation of another section of key roads. Prior to that the DMO issued the country’s debut Sukuk in December 2017, a similar 7-Year N100bn Sukuk Ijara.
A strong feature of FGN Sukuk issuances is its financial inclusion component. Under the issuance objectives, the DMO has stipulated that there has to be an allocation to retail investors. This amounted to just under 5% for the first issuance given the nascency and the unfamiliarity of the product but increased sharply to 17.33% for the second issuance following an aggressive marketing campaign by the DMO. The encouraging aspect was the participation of a wide range of retail investors irrespective of ethnicity and faith affiliation.
The initial reports indicate that the uptake for this third offering was equally buoyant, on the back of an even more aggressive marketing campaign despite a short subscription window of merely 13 days, which ended on 2 June 2020.
“Have you invested in the FGN N150 billion Sukuk offering” stressed the marketing blurb of the DMO, in tandem with the offer period of the FGN’s N150 billion Sukuk issuance. It was aimed at the country’s growing cadre of retail investors in government bonds and Sukuk under Abuja’s financial inclusion policy aimed at giving ordinary people a stake in the economic development of their country.
According to the DMO, this increased retail participation in the Sukuk offering “indicates that the stated objectives of financial inclusion and deepening of the investor base for FGN securities, in addition to infrastructure funding are being achieved.”
The rationale for the issuance of Sukuk, says Patience Oniha, Director General of the DMO “is to enable the government to diversify its sources of funding, deepen the market for domestic securities and improve financial inclusion. Sukuk has a role to play in future government public debt programmes subject to the government’s funding need and portfolio management strategy.”
Nigeria’s sovereign Sukuk issuance is unique in another sense. While governments all over the world are scurrying to raise funds through bond and Sukuk issuances to mitigate the health and economic impact of the coronavirus (Covid-19) pandemic, Abuja has ring-fenced its proceeds from this latest issuance as it has done with the two previous issuances specifically for infrastructure financing.
It is perhaps the ultimate irony that the Covid-19 pandemic that has ravaged the world since December 2019 has been a major boon for issuance of domestic bonds and Sukuk as governments seek to fund emergency mitigation and business continuity packages.
The very quantitative easing in the West is primarily funded by central banks selling treasury bills and bonds. In the MENA region and south east Asia Sukuk certificates seem to be the preferred route for Saudi Arabia, Turkey, Bahrain, Indonesia, Malaysia, albeit some of them have a diversified approach to raising public debt which include conventional offerings.
In Africa the two largest economies, South Africa and Nigeria, have a similar diversified approach including external borrowings and international and domestic debt issuances through bonds and Sukuk. The DMO of the Nigerian Ministry of Finance (MoF), for instance, unveiled its plans for the year 2020 in January, “based on New Borrowings in the 2020 Appropriation Acts, which comprises of N850 billon and N744.99 billion for External and Domestic Borrowings respectively. The New Domestic Borrowings will be raised through FGN Bonds, Sukuk, FGN savings Bonds and possibly Green Bonds.”
Both countries, despite being major commodity producers, have a low revenue base relative to their GDP which is clearly reflected in their high debt service to revenue ratio. This, says the DMO, clearly brings to fore the need for revenues to grow. Nigeria’s debt service/revenue ratio for instance, was 51% at the start of 2018, much higher than the 7.5% each for UK and Canada at end September 2019.
This third N150bn Sukuk Ijara matures in June 2027. The certificates were issued through FGN Roads Sukuk Company 1 PLC (FGN RSCI), a special purpose company wholly-owned by the MoF, on behalf of the federal government. The transaction was managed by FBNQuest Merchant Bank Limited and Lotus Financial Services Limited.
The transaction involved several Nigerian financial institutions as receiving banks and placement agents, including the country’s two dedicated non-interest banks namely Taj Bank and Jaiz Bank, and local subsidiaries of the UK’s Standard Chartered Bank and South Africa’s Standard Bank, namely Stanbic IBTC Bank.
The Sukuk was priced very competitively at a rental rate of 11.2% per annum payable half yearly. This compared to 15.743% for the 2018 issuance and 16.47% for the 2017 Sukuk. This despite the outbreak of the Covid-19 pandemic, the sharp fall in crude oil prices and their impact on the global economy, let alone Nigeria’s oil revenues and public finances. This indicates sustained investor confidence in Nigerian sovereign debt risk and the country is building up a Sukuk yield curve independently of the regular FGN bonds.
It also indicates that the DMO is comfortable with Sukuk as part of the FGN’s public debt raising universe, especially from a value for taxpayer point of view, and that Sukuk issuance is here to stay. The major challenge is whether these successful government Sukuk issuances would now pave the way for corporates and social institutions tapping the market to raise funds. Dangote Mills was working on its debut Sukuk towards the end of 2019, but the Covid-19 outbreak has put that on hold for the time being.
The market, investor community and construction companies linked to road and transport projects have been lobbying the government to continue issuing Sukuk in this sector. The structure includes several corporate governance features which have endeared both investors and the retail community and contractors to Sukuk as a transparent fund-raising instrument.
This includes an arms-length independent audit body to oversee the draw-down of the funds against work completed and commissioned to pre-empt any corruption and mis-use of funds; ring-fencing the funds specifically for the project and work stated in the offer documents; contractors receiving payment promptly as and when due; and Sukuk certificate holders getting paid on time on the given due dates on a semi-annual basis.
The social and development impact of FGN Sukuk especially in its role in the financing of the rehabilitation of key arterial road projects is implicit. This, explained the DMO, “has brought reprieve to road users, improved travel times between major commercial cities, linked borrowing and government expenditure to specific critical projects, helped increase the flow of cargo and passenger traffic across major cities, and improved infrastructure delivery across the country.”
According to the offer document, the Sukuk certificates qualify as securities in which trustees can invest under the Trustee Investment Act; and as Government securities within the meaning of Company Income Tax Act and Personal Income Tax Act for Tax Exemption for Pension Funds, amongst other investors. They are also classified as Liquid Assets by the Central Bank of Nigeria.
The Sukuk certificates are also in the process of being listed on The Nigerian Stock Exchange and FMDQ OTC Securities Exchange.