Nigeria to Guarantee Corporate Bonds in Rail, Power Projects

Nigeria’s government plans to guarantee bonds sold by companies involved in large-scale road, rail and power projects in Africa’s most populous nation, according to the Debt Management Office.

The framework for “issuing the sovereign guarantees is still being fine-tuned,” Patience Oniha, executive director in charge of market development at the Abuja-based DMO, said in an e-mailed response to questions. She didn’t give details of the companies that may benefit from the debt guarantees.

Power supply in Nigeria, Africa’s largest oil producer, is less than half demand, causing regular blackouts in a nation of more than 160 million people. President Goodluck Jonathan plans to sell six power plants and majority stakes in 11 power-distribution companies to end a state monopoly.

Debt guarantees will enable companies to fund projects that “they may ordinarily have been unable to embark upon due to inability to access large and long-term capital required,” Oniha said. The program is “intended to be used as a means of supporting private sector operators who are involved in projects that have large macroeconomic benefits either alone or in partnership with the government.”

Investor Confidence

Investment in infrastructure has failed to keep pace with an economy that’s expanded 6 percent or more every year since 2006, according to data from the International Monetary Fund. Nigeria, the fifth-biggest source of crude oil to the U.S., imports about 70 percent of its fuel because of a lack of refining capacity.

“The guarantee is necessary to win investors’ confidence in the bonds since the projects are long-term and will require long gestation to begin to pay off,” Chris Okoro, a bond analyst at Gosord Securities Ltd. in Lagos, said in a phone interview today. “The high cost of doing business in the country and policy inconsistencies raise the risk perception in borrowing.”

Nigeria’s corporate bond market is limited. United Bank for Africa Plc sold 35 billion naira ($222 million) of bonds last year, while Flour Mills of Nigeria Plc raised 70 billion naira in a bond sale in 2010.

Sovereign guarantees will also reduce the need for the government to borrow directly from capital markets to finance infrastructure projects, Oniha said.

Government Borrowing

The Finance Ministry said in its December budget plan it will borrow 794 billion naira on the local capital market in 2012 to finance a budget deficit that’s set to reach 2.97 percent of gross domestic product this year. The DMO has had to postpone its monthly bond auctions twice this year as borrowing costs increased.

“In view of the high interest rate environment, occasioned by tight monetary policy stance, a moderation in government borrowing would be positive,” Central Bank of Nigeria Governor Lamido Sanusi said on March 20. Government debt stood at 17.8 percent of gross domestic product in 2011, while the ratio of debt-service to government revenue was 19.1 percent, he said.

The central bank has raised its benchmark interest rate by 6 percentage points to a record 12 percent since September 2010.

The yield on Nigeria’s $500 million of Eurobonds due 2021 fell to a record low of 5.39 percent today, 81 basis points down from the beginning of the year. The yield on the government bond due 2015 was unchanged at 15.46 percent, according to prices available on the website of the Financial Markets Dealers Association.

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