Overview of the Bonds Market
FGN Bonds are Debt instruments or contracts issued by the Federal Government of Nigeria for an agreed period of time. The investor lends an amount of money to the government and earns interest on the investment until the maturity of the bond when the initial payments will be returned.
The Federal Government has been issuing the FGN bonds series since 2003. Trading of FGN bonds began in 2006 with the Government appointing 20 PDMMs (Primary Dealers/ Market Makers) of which Zenith Bank is one of them.FGN bonds currently have maturities ranging from 2years to 20years.The interests earned on these bonds are called coupons and are paid semi-annually though they can be paid quarterly and annually. The minimum investment in FGN bond at the auction is N10, 000 (Ten Thousand Naira) per bond maturity.
FGN bonds trade in both the primary market and secondary market. The primary market is where bonds are initially bided for at auctions organized by the Debt Management Office (DMO). This auction usually takes place on the third Wednesday of every month and investors interested in the primary auction can only bid through PDMMs (Zenith Bank). Forms are available on the DMO website: (www.dmo.gov.ng).
The secondary market is for subsequent trading of the bonds. This market is liquid and with large volumes of bonds available. Investors still go through PDMMs. At this point the PDMMs and investors agree on the yield on the bond in question.
All monetary transactions on bonds are done through the CSCS (Central Securities Clearing System) and settlements of transactions are done T+ 2 working days. All investors are required to have this account.
Facts and Background of Federal Government of Nigeria (FGN) Bonds
The Nigeria Bonds market officially commenced in 1946 with the issue of the Nigerian Government registered stocks. This evolved into the Federal Republic of Nigeria Development Loan Stock (a.k.a. FRNDS) in 1963. Issues were suspended in 1987 but rejuvenated in 2003 with the 1st FGN Bonds series. We are currently over the 7TH FGN Bond Series.
The Debt Management Office (DMO) was set-up in October 2000 while the Act establishing it came into force in June 2003. The Federal Government of Nigeria set up the Debt Management Office (DMO) with the mandate to restructure both external and internal debt in order to minimize the cost of financing its projects and maximize returns within an acceptable risk profile.
In terms of domestic debt, the objective for the DMO is to ease up repayment obligation and budgetary pressure on the Federal Government, by restructuring funding of: local debts (owed to contractors as well as pension liabilities); infrastructural projects; and fiscal deficit from short-term (1 year or less) using Treasury Bills, to long-term (over 2 years) using FGN Bonds.
Other reasons adduced for the introduction of FGN Bonds include:
- 1. To provide benchmark instruments that would lead to private sector issuance of longer term instruments
- 2.To encourage long-term savings
- 3.To assist in the development and reform of the pension fund sector.
Benefits to the FGN Bond Holder:
- 1. Tax free Income: interest received on FGN Bonds is not subject to withholding tax, company income tax, etc.
- 2. High and stable returns
- 3. Free from default risk: repayment is guaranteed at the maturity of the FGN Bond
- 4. Collateral for borrowing: the FGN Bond can be used as collateral to raise financing.
- 5. Easily Tradable as it has a unique quality of being quoted on the Nigerian Stock Exchange and can also be traded over the counter (OTC)
THE CENTRAL BANK OF NIGERIA
on the authority of the
DEBT MANAGEMENT OFFICE
on behalf of the
FEDERAL GOVERNMENT OF NIGERIA
Offers for Subscription by Auction and is authorized to receive applications for
N35,000,000,000 FGN Bond 5.50% February 19, 2013 (Re-opening 3-year bond)*
N35,000,000,000 FGN Bond 4.00% April 23, 2015 (Re-opening 5-year bond)*
N35,000,000,000 FGN Bond 10.00% July 23, 2030 (Re-opening 20-year bond)*
Auction Date: August 18, 2010
Settlement Date: August 20, 2010
SUMMARY OF THE OFFER
Issuer
Federal Government of Nigeria ("FGN")
Units of Sale
N1,000 per unit subject to a minimum
subscription of N10,000 and in multiples of
N1,000 thereafter
Interest Rate
For Re-openings of previously issued bonds, (where the coupon is already set), successful bidders will pay a price corresponding to the yield-to-maturity bid that clears the volume being auctioned, plus accrued interest from the original issue date.
Interest Payment
Payable semi-annually
Redemption
repayment on the maturity date
Status
1. Qualifies as securities in which trustees can invest under the Trustee Investment Act
2. Qualifies as Government securities within the meaning of Company Income Tax Act ("CITA") and Personal Income Tax Act ("PITA") for Tax Exemption for Pension Funds amongst other investors
3. Listed on the Nigerian Stock Exchange
4. All FGN Bonds qualify as liquid assets for liquidity ratio calculation for banks
Security
FGN Bonds are backed by the full faith and credit of the Federal Government of Nigeria and are charged upon the general assets of Nigeria
Interested Investors Should Contact Offices Of Any Of The Following
Primary Dealer Market Makers (Pdmms):
Access Bank Plc.
Afribank Nigeria Plc.
Associated Discount House Ltd.
Ecobank Nigeria Plc.
Bank PHB Plc.
CitiBank Nigeria Ltd. (Citigroup)
Consolidated Discounts Ltd.
Diamond Bank Plc.
Express Discount Ltd.
Fidelity Bank Plc.
First Bank of Nigeria Plc.
First City Monument Bank Plc.
First Securities Discount House Ltd.
Guaranty Trust Bank Plc.
Kakawa Discount House Ltd.
Oceanic Bank International Plc.
Stanbic IBTC Bank Plc.
Standard Chartered Bank Nigeria Ltd.
Union Bank of Nigeria Plc.
United Bank for Africa Plc.
Zenith Bank Plc.
Mr Amangbo is an Executive Director in the Bank. He graduated with a B.Eng. in Electrical/Electronics from University of Benin in 1988 and holds an MBA. He worked in PricewaterHouseCoopers, before moving over to Zenith Bank Plc in 1993.
He has over 16years postgraduate experience out of which he spent 12years in the banking industry and 4years experience in PricewaterHouseCoopers.
Frequestly Asked Questions on FGN Bonds
Q. What is a bond?
A. A bond is a contract between a lender and a borrower, whereby the borrower agrees to pay the lender interest and repay principal at stipulated periods. It's similar to an IOU, issued by the Government or an institution as a way of raising funds for particular projects. Bonds have a minimum tenor of over a year.
Q. Who are the issuers of bonds?
A.
Bonds can be issued by either a Government (Federal, State or Local government) or a Corporate Entity. These are the borrowers to the bond issues.
Q. What is a coupon?
A.
Coupon represents the interest payment that the investor in a bond receives as interest payment for investing in a bond. It's normally paid semi-annually, but can be paid monthly, quarterly or annually.
Q. What is an indenture?
A.
This is a document containing the terms and conditions binding both parties (Issuer and Investor) to a bond issue.
Q. Who is a trustee?
A.
They are appointed to represent the interest of the bondholders, to ensure that the promises of the issuer in the indenture are fulfilled
Q. What are negative covenants?
A.
These are restrictions on the issuer's activities, e.g. the inability to incur additional debt while bond has not been redeemed
Q. What are option free bonds?
A.
Option free bonds are bonds that do not have any special features in the indenture, allowing the issuer recall the bonds early or the investor to return the bonds before maturity
Q.What are embedded bonds?
A.
These are bonds that have special features embedded in their indenture, which gives the issuer or investor the right to take certain actions against the other party.
Q. What are the factors that can affect the price of a bond?
A.
The price of a bond is affected by the yield in the market. Yields are affected by interest rates, which in turn are affected by various economic factors like, inflation, government's lending rate, exchange rate, government polices, political stability and other macro economic variables.
Q. What factors can affect the bond market?
A.
a. The credit status of the issuer
b. The forces of demand & supply of such securities
c. The inflation and interest rate movements
d. Activities and performances of the equities market.
Q. What are the benefits of holding bonds in my portfolio?
A.
Bonds are otherwise known as fixed income securities. It's ensures that the investor has guaranteed returns on its investment for a definite period of time. It also assists investors and fund managers in diversifying their portfolio.
Q. How do I invest in the FGN Bonds?
A.
The primary auction where the bonds are freshly issued, usually takes place on the third Wednesday of every month. Investors interested in the primary auction can only bid through primary dealers/market a maker (PD/MMs) of which Zenith Bank is one of them. Minimum investment is N10, 000. The secondary market is for subsequent trading and is open from 10am to 2pm Monday to Friday. The minimum investments are 50 million and 100 million per transaction.
Q. What volumes of these bonds trade in the primary and secondary market?
A.
The minimum investment in FGN bond at the primary market is N10, 000 (Ten Thousand Naira) per bond maturity In the secondary market, bonds with less than 75 billion in issue trade at 50million per transaction while bonds with more than 75 billion in issue trade at 100million per transaction.
ZENB Indicative FGN Bond Prices/Yield as at
8th September, 2010
|
|
ISSUE
DATE |
MATURITY
DATE |
ISSUE TENOR (YRS) |
TERM TO MATURITY (Yrs) |
% COUPON |
Price |
Yield |
| Bid % |
Offer % |
Bid % |
Offer % |
4th FGN BOND SERIES 2 |
23-Feb-07 |
23-Feb-12 |
5 |
1.46 |
9.50 |
107.75 |
107.90 |
3.96% |
3.86% |
4th FGN BOND SERIES 3 |
30-Mar-07 |
30-Mar-14 |
7 |
3.56 |
10.75 |
112.00 |
112.30 |
6.89% |
6.80% |
4th FGN BOND SERIES 5 |
25-May-07 |
25-May-12 |
5 |
1.71 |
9.23 |
104.15 |
104.30 |
6.61% |
6.52% |
| 4th FGN BOND SERIES 6 |
29-Jun-07 |
29-Jun-14 |
7 |
3.81 |
9.20 |
106.95 |
107.25 |
7.08% |
6.99% |
| 4th FGN BOND SERIES 9 |
31-Aug-07 |
31-Aug-17 |
10 |
6.98 |
9.35 |
108.95 |
109.25 |
7.67% |
7.62% |
| 4th FGN BOND SERIES 10 |
31-Aug-07 |
31-Aug-12 |
5 |
1.98 |
9.50 |
104.40 |
104.55 |
7.07% |
6.99% |
| 4th FGN BOND SERIES 11 |
28-Sep-07 |
27-Sep-14 |
7 |
4.06 |
9.25 |
103.00 |
103.30 |
8.36% |
8.27% |
| 5TH FGN BOND SERIES 1 |
23-Jan-08 |
23-Jan-13 |
5 |
2.38 |
9.45 |
104.15 |
104.30 |
7.50% |
7.43% |
| 5TH FGN BOND SERIES 2 |
30-May-08 |
30-May-18 |
10 |
7.73 |
10.70 |
123.80 |
124.10 |
6.70% |
6.65% |
| 5TH FGN BOND SERIES 4 |
28-Nov-08 |
28-Nov-13 |
5 |
3.23 |
10.50 |
106.15 |
106.45 |
8.27% |
8.17% |
| 5TH FGN BOND SERIES 5 |
28-Nov-08 |
28-Nov-28 |
20 |
18.23 |
15.00 |
162.80 |
163.10 |
8.27% |
8.24% |
| 6TH FGN BOND SERIES 1 |
30-Jan-09 |
30-Jan-12 |
3 |
1.40 |
9.92 |
105.30 |
105.45 |
5.88% |
5.77% |
| 6TH FGN BOND SERIES 2 |
22-May-09 |
22-May-12 |
3 |
1.71 |
10.50 |
105.60 |
105.75 |
6.94% |
6.85% |
| 6TH FGN BOND SERIES 3 |
22-May-09 |
22-May-29 |
20 |
18.70 |
12.49 |
128.50 |
128.80 |
9.25% |
9.23% |
| 6TH FGN BOND SERIES 4 |
23-Oct-09 |
23-Oct-19 |
10 |
9.13 |
7.00 |
91.80 |
92.10 |
8.30% |
8.25% |
| 6TH FGN BOND SERIES 5 |
20-Nov-09 |
20-Nov-29 |
20 |
19.20 |
8.50 |
91.75 |
92.05 |
9.44% |
9.40% |
| 7TH FGN BOND SERIES 1 |
19-Feb-10 |
19-Feb-13 |
3 |
2.45 |
5.50 |
95.40 |
95.55 |
7.60% |
7.53% |
| 7TH FGN BOND SERIES 2 |
23-Apr-10 |
23-Apr-15 |
5 |
4.62 |
5.50 |
80.50 |
80.80 |
9.29% |
9.20% |
| 7TH FGN BOND SERIES 3 |
23-Jul-10 |
23-Jul-30 |
20 |
19.87 |
10.00 |
87.20 |
87.50 |
11.66% |
11.62% |
FGN Bonds Time Table
Debt Management Office (DMO) Auction Time Table:
FGN Bonds Issuance Calendar For The Third Quarter
| Auction Date |
Tenors (Competitive) |
Total |
| 3-Year |
5-Year |
20-Year |
| July 21, 2010 |
35 |
35 |
35 |
105 |
| August 18, 2010 |
35 |
35 |
35 |
105 |
| September 22, 2010 |
35 |
35 |
35 |
105 |
| Sub-total |
105 |
105 |
105 |
315 |
Note:
a) The Debt Management Office reserves the right to increase amount to be alloted as it considers
necessary
b) All issues are re-openings except the new issue of N35billion (20-year) scheduled for July 21,
2010
c) This Calendar is subject to adjustment, as the 2010 Supplementary Appropriation Bill is yet to
be passed
by the National Assembly
d) Non-competitive allotment would be announced through monthly offer circular
DEBT MANAGEMENT OFFICE
NIGERIA
The Presidency
NDIC Building (1st Floor), Plot 447/448, Constitution Avenue, Central Business District, PMB 532, Garki, Abuja
Tel: +234-9-6725629, +234-9-6791088, +234-9-6712769
Website: http//www.dmo.gov.ng
Basis of Allotment for the 5.50% FGN FEB 2013 (Re-opening),
4.00% FGN APR 2015 (Re-opening) & 10.00% FGN JUL 2030 (Re-opening).
|
5.50% FGN FEB 2013 |
4.00% FGN APR 2015 |
10.00% FGN JUL 2030 |
Auction Date: |
August 18, 2010 |
August 18, 2010 |
August 18, 2010 |
Settlement Date: |
August 20, 2010 |
August 20, 2010 |
August 20, 2010 |
Maturity Dates: |
February 19, 2013 |
April 23, 2015 |
July 23, 2030 |
Tenors: |
3-Year |
5-Year |
20-Year |
Issue Amount: |
N35 billion |
N35 billion |
N35 billion |
Total Bids: |
129 |
78 |
115 |
Successful Bids: |
77 |
56 |
69 |
Subscription: |
N82.69 billion |
N50.88 billion |
N 69.29billion |
Amount Allotted: |
N42.49 billion |
N42.33 billion |
N41.64 billion |
Range of Bids: |
1% - 13.49% |
4.00% - 14.98% |
6.00% - 18.1841% |
Marginal Rates: |
7.54% |
9.25% |
11.00% |
Prices: |
95.4339 |
80.4234 |
91.9685 |
Successful bids for the 3-year, 5-year and 20-year offers were allotted at the marginal rates of 7.54%, 9.25% and 11.00% respectively. However, the original coupon rates of 5.50%, 4.00% and 10.00% for the 3-year, 5-year and 20-year respectively will be maintained.
Mr. Emmanuel is a General Manager and Group Head of Income Optimisation, Financial Control & Strategic Planning Department. He holds a Bachelors degree in Accounting from the University of Lagos in 1988. He brings into the Management team many years of quality experience from PricewaterHouseCoopers and Diamond Bank Limited before moving over to Zenith Bank Plc in 1996.
He has over 16 years post graduate experience out of which he has 10 years of banking industry experience in addition to 6 years experience in PricewaterHouseCoopers.
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