Juxtaposed against the increasing costs of bank loans, it would appear that the capital market may provide a viable alternative for raising finance. In this regard, project bonds are gradually becoming a sustainable instrument for obtaining capital required for infrastructure.
This article seeks to consider the nature of project bonds as well as the Nigerian regulatory framework for the issuance of same.
Nature of Project Bonds
Project bonds are debt instruments issued to the domestic or international capital markets to finance the whole, or part, of a project. They may be privately or publicly issued and are secured over the assets of the project/project company with recourse limited to the cash flows generated by the project.
Bond issues in Nigeria are regulated primarily by the following laws/regulations:
The Investments and Securities Act, 2007;
- Rules of the Securities and Exchange Commission, 2013 (“SEC Rules”);
- Listing requirements of the Nigerian Stock Exchange; and
- The Companies and Allied Matters Act, CAP C.20 LFN, 2004.
As is the case with many jurisdictions, bond issuances under Nigerian law are principally classified based on the issuing entity as well as the issuing structure (e.g. bonds issued by shelf registration or as a single bond issue) and not according to the purpose for which the bonds are issued. Accordingly, any government, public liability corporate entity or multinationals may issue project bonds in the Nigerian context provided the issuer is able to maintain the required investment grade ratings and meet with the general issuing requirements as well as other requisites for a project finance. In addition, private companies may issue debentures by way of private placement with features similar to bonds.
In relation to rating, it is important that the issuer (project company/sponsor) maintains, a good financial record together with an investment grade rating being a key credit enhancement technique to attract investors. The guarantee of a highly rated entity (e.g. a multi-lateral development bank like AFDB) may effectively enable the proposed issue have a good credit rating and further attract investor participation. Furthermore, key underlying project documents such as offtake agreements are required to be negotiated based on internationally accepted standards.
For issuance by a state or local government in Nigeria, an Irrevocable Standing Payment Order (ISPO) by the issuer to the Accountant-General of the Federation/Minister of Finance authorising the deduction of the principal and interest from the statutory allocation of the State/Local Government to support the bond issuance is also required to be in place unless waived at the discretion of the Securities and Exchange Commission (“SEC”) on the application of the issuer’s advisers.
At the macro-economic level, a reduced inflation rate, fiscal/monetary stability, stable interest rates, investor friendly laws and continued evaluation of existing legal framework is required to further support the issuance of project bonds.
The procedure for project bond issuance is broadly as follows:
- A project sponsor is required to identify a project for funding and ensure that the underlying key project documents are negotiated based on internationally accepted standards;
- A feasibility study is conducted to determine the viability of the project and whether same is able to attract investment from the capital market;
- Once the project is identified and feasibility studies are favourable, the issuer will engage professional advisers which typically include financial advisers, issuing houses, solicitors, reporting accountant(s), receiving bank(s), registrar(s), trustee(s), etc. who will assist it in structuring and consummating the bond issuance;
- Necessary regulatory approvals are processed and disclosures made to applicable agencies such as the SEC and the Nigerian Stock Exchange in the event of a listed issuer;
- Upon receipt of regulatory approvals, the offer of the bonds is made and allotted to investors; and
- Upon completion, the bonds are listed and any post transaction filings are made to the SEC.
The Nigerian bond market is attractive to investors as bonds issued in Nigeria are tax exempt and may be issued with long tenors. Furthermore, bonds issued in the Nigerian legal clime are transferable and are admissible for listing. Bonds also qualify for investments by institutional investors such as pension funds in Nigeria.
The huge infrastructure deficiency in Nigeria in telecommunications, transport, infrastructure, housing and power sectors provide viable prospects for project bond issuance. As an illustration, the Nigeria Mortgage Refinance Company Plc has recently issued bonds to bridge the large housing deficit in Nigeria by infusing some more liquidity into financial institutions funding housing projects.
It is noteworthy that the dwindling oil prices and its ripple effect on the Nigerian economy has had its toll on the Nigerian bond market. Nevertheless, with the Nigerian government’s commitment to encouraging foreign investment, it is hoped that significant interest in the Nigerian bond market will be rekindled.
In addition, the appetite for risk of bondholders is generally low and it may be challenging to market project bonds solely on the basis of project receivables and assets. Accordingly, project sponsors are encouraged to issue bonds in respect of projects that have reached commercial stage.
Finally, the level of disclosure required and the demanding process of issuing a bond may be a disincentive to issuers.
Whilst there are challenges in the process of the issuance of project bonds, they still remain a viable means of funding various projects in Nigeria. Accordingly, project sponsors must position themselves to be able to meet with the applicable regulatory requirements as well as commercially package a bankable deal which is able to attract investors.