Announcements of corporate bond issuing and rights issue capital raising are up significantly in 2017 (Source: This Day). Many see this as a sign of economic recovery here in Nigeria.
But is it?
We would all be delighted if this news meant we can forecast the end of the recession.
But is it as it appears?
Analysts will say it is, but let’s be pragmatic and view it from an experienced executive’s perspective.
Firstly, what issues do large corporations in Nigeria have in operational requirements that could drive a debt/equity funding round?
The issues are largely as follows;
- Paying for USD denominated debt when revenue is in Naira and dollar scarcity/exchange rate is bad.
- Price of raw materials is high (local inflation or poor naira value when importing)
- Poor business strategy relying on a non-existent large middle class with semi-western “behaviour” and the resulting need for funding to stay afloat/change direction
- Price of debt from commercial banks is exorbitantly high
Those with a coherent long term strategy might also might want funding to exploit opportunities:
- Backward integration to reduce cost/unreliable raw materials
- Establishing mass market expansion in preparation for the explosive population growth and purchasing potential
- Expand capacity to fill space left by competitors who are in trouble
- Looking to gain working capital in preparation for making the most of the Federal Government’s much publicised (but not yet material) infrastructure investment.
Of the companies that have announced fund raising, most are international consumer packaged goods companies or infrastructure construction companies.
One mechanism the local branch of an international corporation uses to repay debt to the parent company or to transfer funds, is through a rights issue.
This method has been used on several occasions in recent times by several companies.
This effectively bypasses the issues around naira value and dollar scarcity and allows the parent to invest in Nigeria without having this (constantly) hit the expenses line of the P and L.
This also avoids the costly and risk prone debt funding situation most companies in Nigeria fear today.
Issuing bonds achieves much the same objective (especially if completed using convertible bonds).
So whilst all this equity and bond noise indicates a long term belief in Nigeria, which all of us share, it does not indicate impending recovery.
Rather it indicates the structural issues that companies have in Nigeria, and the methods they are having to use to pay off debt or position themselves with working capital for the future.
There is a bull run at the NSE right now. Driven by exuberance rather than fundamentals.
If this bull run turns bearish or the oil price dips, expect the rights issues to be indefinable postponed.
Don’t forget, these rights issues are being publicised by the companies to garner reaction but they are not guaranteed to occur. Similarly with the bond sales. The companies in question can pull out at any time.
So does this indicate recovery or just companies getting creative to deal with current issues?
Time will tell.