Corporate Nigeria abandons capital market
…as firms proposed public offers
Nigeria’s capital market once the bread basket for firms hungry for long term funds, have since gone into terminal coma. With recession fever shaking the confidence of private investors in long term commitments, the capital market has since become a shallow ghost of its former self; Initial Public Offers (IPO’s) and Private Placements that were once choice flavours of the market as recently as 2009, have suddenly become dead.
Tunde Ariwajoye, head analyst for investment house, Orient Asset & Trust , points to the fact that the local new issues market has slipped into oblivion, ‘companies simply are not interested in improving their debt to equity ratios by raising funds from the capital market anymore for two simple reasons; first the market is currently ‘soft’, meaning that equity prices are pretty disappointing, and second, and perhaps of greater concern, not coming to the market is a whole lot better and honourable than having to face the tragedy and embarrassment of a failed Offer’. According to Ariwajoye, ‘ a relevant local adage says that if you cannot make my condition any better, kindly do not make it worse!’
Hitherto several companies have been beneficiaries of a strong capital market with the restructuring of their capital base creating local giants such as the Dangote Group. Equally many banks have been able to take advantage of a lively market to recapitalize and enhance their stability and liquidity. This has paid off in spades over the last decade. In fact, the banking sector has been one of the greatest beneficiaries of the capital market in recent years.
The 2005/2006 banking consolidation exercise in which financial institutions were compelled by the central bank (CBN) to raise their shareholders’ funds to N25billion, reflecting how banks took advantage of a vibrant long term market for capital to improve their fortunes and perhaps guarantee survival.
Business Hallmark research reveals that several billions of naira was raised from the market in 2005 to recapitalize 25 banks to the tune of N359billion at the time, hundreds of billions were equally raised to support the capital requirements of many other non-bank corporate entities. Analysts believe that Zenith Bank, G T Bank and Access Bank among other banking institutions are large and stable today because of big ticket market transactions that raised equity to soften the adverse effects of a declining global economy and a shrinking domestic savings culture. The new money raised by way of equity replaced the slowly disappearing savings deposits that had, hitherto, been used for third party loans and advances.
Current economic conditions have seen a sea change in conditions. Companies in need of funds other than bank loans have found it difficult to raise such money. Poor market liquidity, growing investor apathy and higher coupon rates and yields on fixed interest bonds have made the local capital markets new issue business unattractive.
BH research team observes that recently even companies which had previously expressed their desires to source funds from the capital market have pulled back worried by present market outlook. Industry watchers recall that Zenith Bank, Skye Bank, Sterling Bank, Diamond Bank, FCMB, Wema Bank, Unity Bank, Forte Oil among others who had expressed interest in raising funds from the market have reversed those decisions, as they sit in a holding position until the environment becomes more attractive. Te general perception seems to be that the capital market can no longer supply funds at reasonable costs.
Further investigation show that only Seplat Petroleum Development Company Plc and Caverton Offshore Support Group have done successful Initial Public Offerings (IPO’s) and Private Placement that were listed as far back as 2004. Besides the duo, no other IPO has taken place since 2008. In fact, only Right Issues (sale of shares to existing shareholders in proportion to their current shareholdings) have recorded successes in the market since then. The successes have been hinged on the fact that existing shareholders , in the main, represent ‘captive’ buyers of new shares. For quite some time, Right Issues have remained the only market game in town, especially for companies that could galvanize support from pre-existing shareholders.
Interestingly, about five companies listed on the Nigerian Stock Exchange (NSE) have approached regulators seeking for N160bn fresh capital to boost their business operations.
Forte Oil Plc said it would raise N50bn debt capital before the end of the year for the expansion of its operations.
Flour Mills of Nigeria Plc has also approached regulators to raise N40bn in equity in three years. Similarly, the Sterling Bank Plc, Wema Bank Plc and FCMB Plc planned to raise N35bn, N20bn and N15bn in fresh capital, respectively. Most recently Zenith Bank had sought to raise N50billion through a combination of equities, bonds and Global depository receipts. Why have the companies retraced their steps and what has changed?
The capital market has been struggling over the last decade and has remained bearish, with investors weary and restless.
This year alone the stock market has lost-5.22 per cent of its value year- to- date.
The All-share Index stood at 25,746.52 points as at Friday April 7, 2017.
Not even the banking sector which is not only the dominant sector but also the most actively traded could back stop the weekly tumbles.
The develop0ment has worried several investors who seem to be looking for clarity amidst rampant uncertainty. Particularly worrisome was the fact that the market had developed niggling volatility that reversed hopes that prevailed when it seemed that the President Muhammadu Buhari administration was going push growth oriented policies.
A bevy of stocks have also been reeling from their unprecedented heights to lower levels. Whereas, many investors are optimistic that the downward bound market would reverse the losses that have been recorded, subtle fears are now palpable that this may be an encore of the experience of 2009.
Investors’ hope of recouping their investments has dimmed. The mood on Broad and Marina streets has changed to that of despondency. Of the 20 respondents who spoke to Business Hallmark on Customs Street, 18 expressed deep regrets that “there is nothing in the market for us again”.
Nowadays, most of the Stock traders look dazed after each trading day. BH recalls that in the corresponding period of 2008, the market maintained a bullish disposition and investors smiled to the banks. The major indicators attained unprecedented heights.
The market capitalization peaked at about 13.1trillion and the All-share Index gained a giddy height of 66,551.84 basis points on March 5, 2008. Most of the equities grew bullish and the Nigerian Capital Market was thrown into frenzy.
The market became the toast of the Nigerian Business community, with traders, civil servants, farmers and even students making equity investments.
Many analysts noted that the Nigerian Stock Exchange (NSE) became a beehive of activities with both investors and speculators scrambling to make a kill. Some individual stocks recorded over 100% appreciation while others edged up by 50% and above.
But the story has since changed. The market continued in the red disposition and is plunging further by the day.
What does the economy offer?
Unfortunately, the government economic vision has not really offered hope to the citizenry. Whereas the government is still struggling to implement its promises for an expansionary economic focus for 2017 given the budget, there is still fear as she has not been able to borrow funds to fund its budget. As the nation struggles to get out of the present quagmire, many industry observers have expressed doubt given the current shrinking revenues.
A bleak future awaits the market for obvious reasons. The massive decline in the value of the Naira which trades officially at N315 a dollar and N390 at the parallel market has made investment difficult. Though the Naira seems to be appreciating now from about N350 (Officially) to N315 and N520 (Parallel Market) to N390 per dollar, the International Monetary Fund (IMF) still believes the Naira is overvalued by 20 per cent
Interest rates are still very high and unfriendly at the giddy height of 30 per cent and this will continue to keep the value of stocks down and low.
Foreign investors have remained on the edge and are not as comfortable to invest much in Nigeria given the weakness of the Naira which will have reduced the value of their expected dividends and capital gains as most of them are reportedly divesting while others are waiting on the wings.
Some international agencies had also announced the deep risk in investing in Nigeria to the foreign investors as many of them may be considering moving their investments to other more viable investment destination.
Government’s revenue has shrunk badly given the sharp fall in the price of crude which plunged from $114 per barrel on June last year to hover between $45 and $50 currently.
Experts blame the overall weak macro-economic outlook; the sustained negative market sentiments, and the falling oil prices as responsible.
The spokesman, for Securities and Exchange Commission, (SEC), Mr. Naif Abdulsalam said the apex regular of the capital market is not unaware that some of the companies that have obtained approval from SEC to raise funds have not been able to do so.
Abdulsalam explained that raising money from the capital market was purely a business decision regarding the disposition of the firm involved. He added that most of them may be looking at the disposition of the market to make a decision on the best time to ask the public for funds.
Analysts suspect that any public offering or Rights issue packaged at this moment would fail. This is because investors are already weary and have little or no money to spare for investment.
Fear of failure in initial public offers has compelled banks to look elsewhere for terribly needed money; banks have shifted attention to other sectors to source capital for their operations.
Mr. Ambrose Omordion of Investdata Limited had been quoted as saying that the complete absence of initial public offers (IPO), and public offers in the equities market can be attributed it to the depressed nature of the economy and the low level of confidence among the investing public.
According to him rights issue and public offers cannot thrive in an environment where the secondary market (trading on the floor of the exchange) is not vibrant, explaining that several reasons entice companies to list on the exchange.
”I’ m not optimistic at all. The economy is not favourable to the capital market so how will anybody contemplate doing a public offering or initial public offering now. The capital market is in more trouble than we can imagine”, a former managing director of one of the big banks who declined being named in print, said.
Also commenting on the issue, Managing Director, Crane Securities limited, Mr Mike Ezeh, told BH that there is apathy toward the capital market.
‘’To raise money from the public now is difficult. There is negative impression about the market which has been worsened by the weak economy that is deep in recession. Even existing shareholders are not easily wooed to take up their rights. They think about it thoroughly before doing that’’, he said adding that Guinness Nigeria which is doing a right issue now can be finding easy.