Bond issuance, stock value

I will try to give a quick review of bonds, the basic characteristics of the Eurobond, potential benefit(s) to the Nigerian economy and likely effect(s) on the stock price of the issuing entity, if it is traded in the stock market.

A bond is essentially a kind of loan that companies use to finance their projects. Bonds can be for 1 year or even for as long as 30 years so it depends on the structure of the bond itself. Not every company can actually issue bonds as they need to have a very good reputation and also relatively large.

Entities like large multi-national companies, banks or governments could qualify to issue bonds – this means smaller companies that want to expand may have to go to a bank for loans. Essentially, when an entity issues (or sells) a bond, they are saying, “lend me some of your cash and we will pay you back in x years”.

When bonds are issued (or sold) to investors, the issuer will agree to either pay their debtors (as they are) a fixed periodic percentage of the loan also called “coupon payments” and at the end of 5 years (for a 5-year bond), they refund the initial investment. Some bonds do not get coupon payments but for the purpose of this discussion, we shall be talking about the Eurobond which often incurs a coupon payment.

The Eurobond is not necessarily a bond that is issued in “Euros”. The “Euro” in the bond simply tells us that the bond is not denominated in the local currency – so it could be in dollars, yen, euros etc. - you get the drift. What this means for example, is that the “issuer” can issue bonds denominated in US dollars in Nigeria – this is called a Eurodollar bond!

There are various kinds of “Eurobond” structures and they include equity, fixed-rate, floating-rate, zero-coupon, reverse-floaters etc. The list can be endless as they can be tailored to the requirements of the potential investor(s).

These kinds of bonds have the advantage of being cheaper than other kinds of bonds because they are not usually exposed to taxes or regulations that other bonds are. Now that we have described Eurobonds, how will it benefit the Nigerian economy if Access Bank issues them? Foreign exchange (FOREX)!

When local Nigerian companies want to export/ import (or expand) their goods and services, they need FOREX to send (or receive) goods out of/ into Nigeria – most times. Not many banks can afford to grant these loans (especially at the moment) and those that can, potentially ask for high interest rates and other charges. This is where Access Bank’s reasoning comes in – to have enough capital to loan companies for expansion!

Since Eurobonds are a cheaper source of funds relative to other debt methods (in theory), I would ordinarily expect that it should be easier for a well-known, investment grade company (companies considered to have low risk of default to investors) to get funds from the bank at a cheaper rate, and less hassle than if it had gone looking for capital on its own.

This is my opinion I might add! If this is the case, we would therefore expect there will be more production from manufacturers, more exports, jobs, local development, higher government income and potentially economic growth - one step at a time.

It is important to note that subject to the “bond covenant”, there can be restrictions depending on the bank’s credit worthiness or score. For example, the investors could insist that until there are paid, Access Bank may not:

pay dividends to shareholders
issue more debt until they are paid
engage in acquisitions

At the time this article was written, Access Bank was rated as “B+/B” as recorded on their website – this is not really great but relative to its competition in the country, it is okay!

Now if the bank grants loans to the right entities, I would expect that the loan coupon payments will be made regularly (to avoid defaults) from the returns (interest payments) that the local companies are making (expected but not necessarily always true).

Since the bank is there to make money, we would also assume that the interest rates set for the loans it grants, will more than meet the coupon liabilities it has incurred by issuing the debt. The rest is simple - higher revenues, higher profit after tax, higher earnings per share and potentially, higher stock price. This is assuming there are no hiccups along the way like bad debts etc.

In my opinion, it is a good move by the Access Bank to go ahead (if it does) with issuing Eurobonds, both for its shareholders and (potentially) the Nigerian economy at large in the medium to long-term. However we shall await its execution - if it does happen.

As always, remember there is no 100% risk proof investment – just try to minimise your risk!

Do let me know your thoughts, questions and suggestions because they are all welcome!

Keep investing,

Your Investment Analyst