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By Chinwendu Obienyi
The first half (H1) of 2024 saw a significant decline in both commercial paper and corporate bond issuances, with market participants increasingly cautious amid rising borrowing costs and macroeconomic instability.
Data from PricewaterhouseCoopers Nigeria report tagged; Nigerian Capital Market update revealed that in the period under review, the commercial paper market saw a 37% drop in value, with issuances totalling N503 billion across 76 deals, compared to N797 billion from 104 issuances in H1 2023.
The report revealed that the number of issuances also fell by 27%. This decline according to PwC Nigeria can be attributed to the higher interest rates resulting from the Central Bank of Nigeria (CBN)’s aggressive monetary tightening aimed at curbing inflation. As borrowing becomes more expensive, companies are less inclined to tap into the commercial paper market.
A cursory look at the report revealed the manufacturing sector was the dominant player in this market, accounting for 63% of the total issuance value. The financial services sector contributed 19%, while sectors like agriculture (2%) and consumer foods (7%) made smaller contributions. The standout issuer was Dangote Sugar Refinery Plc, which accounted for 28% of the total issuance value, raising N142 billion.
Furthermore, the corporate bond market was hit even harder, experiencing an 83% decline in H1 2024. Only one corporate bond was issued, marking the lowest number in the past five years. The Eat & Go Finance SPV PLC was the sole issuer during this period.
The sharp decline is largely attributed to the rising cost of borrowing, as corporate bonds are particularly sensitive to interest rate fluctuations. Companies have steered away from issuing bonds due to the higher yields demanded by investors.
In contrast, the Federal Government of Nigeria (FGN) issued a significant volume of bonds in the past year, totalling N6.25 trillion between July 2023 and June 2024. However, this was still a 59% decline compared to the previous year. A large portion of this issuance was in plain FGN bonds (93.9%), with smaller portions in sukuk bonds (5.6%) and savings bonds (0.52%).
The yield on the benchmark 10-year FGN bond increased by 281 basis points from 14.69% in June 2023 to 17.5% in June 2024. This can be attributed to the macroeconomic headwinds in the country such as the rising interest rates and inflation rates.
Reacting to the development, analysts noted that the decline in commercial paper and corporate bond issuances in H1 2024 is a clear reflection of the broader economic pressures and the rising cost of capital.
“Companies are becoming more cautious in their financing strategies, with many choosing to wait for a more favourable market environment before issuing new debt. With inflation and interest rates expected to remain elevated, the outlook for the debt issuance market remains uncertain in the short term”, they said.
