In recent times, the Nigerian Bond market has experienced a low turnout of investment and even withdrawal from investors due to various reasons. Today.ng reports that investors in London are wary about investing in Nigerian bonds due to uncertainty regarding the Nigerian fractured foreign exchange market. It is also reported that Foreigners held $5.4 billion of Nigerian bonds in September 2013 but dumped them after the country was ejected last year from the most widely used GBI-EM debt index.
However, bonds still remain an attractive source of funding for companies seeking debt funding in contrast to equity funding which may deplete control and ownership of the Company. Bonds are also attractive to Governments seeking an alternative source of revenue for financing specified projects.
According to Investopedia, a bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issue. Bonds are commonly referred to as fixed-income securities and are one of the three main generic asset classes, along with stocks (equities) and cash equivalents. Many corporate and government bonds are publicly traded on exchanges, while others are traded only over-the-counter (OTC).
ISSUING CORPORATE BONDS
Stage 1- Eligibility : A company seeking to issue corporate bonds must be either a Public Company, Foreign Public Company or Supranational Body. Also, the issuing body must ensure necessary approvals from SEC and other bodies are obtained before the issue. Rule 568 of the SEC 2013 Rules also stipulate that all issues must be rated by a rating agency. To ensure security for the purchaser, the rule further states that a Company in default of interest or repayment of principal in respect of previous debts issuance for a period of more than six (6) months is not eligible for a debt offering.
Stage 2- Due Diligence :A company seeking to offer bonds must conduct both legal and financial due diligence. Legal due diligence may be done by the Company’s Solicitors who will review the Company’s Memorandum and Articles of Association for restrictive clauses that may hamper the issue. Financial due diligence will entail a review of the Company’s financial records to evaluate a projection of the source and application from the issue. A review of the tax implications of the issue will also be necessary.
Stage 3- Mode of Issue: Depending on its target market for the issue, the company is allowed to issue Bonds either through public offer or private placement. An issuer should confer with its issuing house, underwriter, and/or financial advisor before the offering.
Stage 4- Authorization: Before the issuance, the board of Directors of the issuing Company must authorize the issue by passing a board resolution to that effect. A resolution of the General Meeting will be required where the amount to be borrowed is beyond the specified limit on the borrowing powers of directors in the Memorandum and Articles of Association of the issuer, and where the bond to be issued is convertible.
Stage 5- Filing and Application Stage: The company will file a registration statement accompanied by the following documents;
- Duly completed form SEC 6;
- Appropriate filing and registration fees;
- Two (2) copies of the board resolution authorizing the issue of the bond or special resolution if needed
- Two (2) copies of the Memorandum and Articles of Association(CTC)of the Issuer
- A copy of certificate of incorporation of the issuer certified by the company secretary;
- A signed copy of the Issuers latest audited accounts for the preceding three (3) years, with the latest account not more than nine (9) months old at the time of filing with the Commission;
- Reporting accountant report;
- Consent letters of the parties to the offer;
- Two (2) copies of the draft vending agreement between the issuer and the issuing house;
- Draft underwriting agreement (where applicable);
- Rating report by a registered rating agency;
- A letter of “No Objection” from the relevant regulatory body (where applicable);
- Two (2) copies of draft trust deed;
- A draft prospectus, right circular, placement memorandum or any form of information Memorandum with specified contents in RULE 567(n)(i-xi)
- Declaration by the issuer on compliance with all requirements of the Act
Generally, Companies seeking to offer bonds should be wary of issues such as:
- The cost of timing of issuance (e.g., interest rate environment may rise, thus cost of funding rises)
- Fees; Issuance costs; the smaller the issuance, usually the greater percentage the costs are to size of issuance,
- Initial and ongoing reporting obligations and requirements to regulatory bodies and to bond holders,
- Downgrading of credit rating which may affect subsequent borrowings,
- Low demand on issuance thus interest paid may have to increase to satisfy investors’ demands.
This piece was written by Chidi Odoemenam a capital market associate with Aluko and Oyebode a Law firm in Ikoyi Lagos Nigeria.