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Businesses opt for unconventional debts as interest rate nears 35%
2 years ago

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Rising Interest Rates
• Convertible, inter-company loans on
increase

• Six firms raise N364b from capital
market in five years 
• High cost of borrowing weighing on
real sector, operators warn 
• Stockbrokers task incoming
administration on cost of borrowing,
inflation 
• SMEs in limbo, pay as much as 32%
on commercial loans

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Rising interest rates, devaluation,
and inflation have continued to push
businesses away from conventional
loans, with six firms raising N364.1
billion from the debt capital market
in the last five years.
This comes as blue chips explore
alternative funding to survive
unaffordable borrowing cost, which
has risen to the region of 30 per
cent. 
Whereas the Central Bank of Nigeria
(CBN) pegs the maximum lending
rate at 28.08 per cent as of the end
of March, The Guardian learnt that
some small and medium-scale
enterprises (SMEs) pay as much as
33 per cent as interest on
commercial loans.
For microfinance banks (MFBs),
which price their loans at monthly
interest, the cost is much higher.
The going monthly interest rate at
the micro lenders level ranges from
two to five per cent.

The Monetary Policy Rate (MPR), the
benchmark for determining
commercial interest, is 18 per cent.
Some experts say the high MPR is a
major cause of the country’s rooftop
commercial loan prices.
While small businesses do not have
many options outside the expensive
commercial credits, the big
companies are increasingly
migrating to the capital market. 
In the past five years, ABC Transport
Plc, Ardova, Dangote Cement Plc,
Dangote Group, Family Homes
Funds Limited (FHFL) and Lagos
Free Zone Company (LFZC) have
raked in a whopping N364.1 billion
from the capital market. 
Data from the Nigerian Exchange
Limited (NGX) revealed that the
firms raised bonds valued at N364.1
billion over the last five years (from
2018 to 2022). In the same period,
the Federal Government raised N2.5
trillion ($5.25 million) bonds in the
debt market.
 
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FMDQ Securities Exchange data also
disclosed that 65 corporate
organisations have raised
commercial papers (CPs), while 42
others issued bonds on its platform.
The Guardian learnt that corporate
entities have also adopted the
convertible debt method of
borrowing, an early-stage investors’
means of loan acquisition, where a
company borrows money from
investors and both parties agree that
the borrowed funds will either be
repaid with cash or equity. 
Convertible debt notes were
introduced to enable startups
without a valuation to raise capital
quickly and in a less expensive
manner as a feasible alternative to
obtaining bank loans.
But corporates, seeking to survive
the current harsh operating
condition and borrow more cost-
effectively, have adopted this
method of borrowing specially
designed loans for startups to keep
afloat until the nation’s
macroeconomic conditions improve. 
Further investigations revealed that
corporates also access inter-
company loans presently to survive.
This is a form of loan from one
entity to another, within the same
company.

Inter-company lending offers
multiple advantages, such as quickly
shifting cash between entities or
avoiding bank fees and spreads.
A breakdown of the bond issuances
from the six firms indicated that
ABC Transport Plc floated N1.13
billion rights issue for existing
shareholders and subsequently listed
1,127,236,000 ordinary shares of 50
kobo each at N0.35 per share, based
on 68 new ordinary shares for every
100 ordinary shares held as at the
close of business on November 30,
2021. 
Ardova Plc completed the issuance
of N25.3 billion series 1 fixed rate
senior unsecured bond, issued under
its N60 billion debt issuance
programme. 
The issuance, which was described
as the largest local currency bond
issuance by an indigenous oil and
gas company in the history of the
Nigerian debt capital markets,
attracted participation from
institutional investors, including
pension funds and asset managers.

Africa’s largest cement producer,
Dangote Cement Plc, also announced
the successful issuance of 50 billion
series 1 fixed rate senior unsecured
bonds under the company’s new
N300 billion multi-instrument
issuance programme. 
The bonds were issued on May 26,
2021 at coupon rates of 11.25 per
cent, 12.50 per cent and 13.50 per
cent for the 3, 5 and 7-year tranches
respectively.
The proceeds of the bond issuance
were deployed for the company’s
expansion projects, short-term debt
refinancing and working capital
requirements.

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Furthermore, the cement
manufacturing giant also floated
N88,396,000,000 10-year 13 per cent
fixed rate senior unsecured bonds
due 2032.
Dangote Industries also assessed
N10,465,500,000.00, 17-year 12.75
per cent series 1 senior unsecured
bonds due 2029 and another
N177,119,045,000.00, 10-Year,
13.5per cent, series 1, tranche B
senior unsecured bonds due 2032. 
Another corporate, Family Homes
Funds Limited (FHFL), through the
Family Homes Sukuk Programme,
raised N10 billion seven-year 13 per
cent Series 1 Ijara Lease Sukuk due
in 2028, under its N30 billion Sukuk
Issuance Programme.
Lagos Free Zone Company (LFZC)
also completed issuance of a N25
billion 20-year series II senior
guaranteed fixed rate corporate
infrastructure bonds due 2042
(LFZBonds) under a N50 billion debt
issuance programme. 
For the convertible debt, AIICO
Insurance had, in 2015, obtained a
loan of $7 million from the IFC at an
interest rate of 6.5 per cent plus 6-
month LIBOR for seven years with a
moratorium period of four years on
the principal.

Fidelity Bank Plc announced the
completion of a private placement of
3.03 billion units of its shares this
month.
Chairman of the bank, Mustafa
Chike-Obi, said the board resolved
that the company’s outstanding
3,037,414,308 unissued ordinary
shares of 50 kobo each should be
disposed of by way of a private
placement to strategic investors to
enable the bank to generate
additional capital for continued
growth in line with its objectives. 
For the inter-company loan,
Nigerian Breweries, at the just-
concluded yearly general meeting,
received shareholders’ nod to obtain
inter-company loan of 110 million
euros from Heineken International,
which is meant to settle foreign
currency-denominated payment
obligations of the company.
Chairman of the company, Kola
Jamodu, while speaking on the loan,
stressed that it was necessary to help
the company address the challenge
of forex and pay off some of its
overdue foreign currency-
denominated payables.

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According to him, it will also help to
ensure there is no disruption in its
operations due to a shortage of
imported raw materials, as its
procurement agent would have
stopped its services as a result of the
overdue payables. 
Reacting to the issue, Head of Equity,
Planet Capital, Paul Uzum, said with
the development, companies in the
real sector of the economy that
perpetually depend on borrowed
funds will struggle due to high
finance costs.
Already, many companies in the
consumer goods sector that showed
strong signs of recovery and massive
growth in Q1 and Q2, recorded weak
numbers in Q3 and Q4 of 2022.
Uzum noted that the cost of issuing
CPs and bonds has also increased
significantly. 
He pointed out that the risk of such
debt issuance in an era of high-
interest rates is that a few years
from now, economic conditions may
change with interest rates falling
significantly to 2021 levels.
According to him, if this happens,
companies would have been
committed to paying coupon interest
at a high interest rate until the debt
matures.

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Vice President of Highcap Securities,
David Adonri, said rising inflation is
increasing the cost of doing business
in Nigeria, thereby mounting
pressure on companies working
capital on one hand while
contractionary monetary policy is
increasing interest rates in the
economy on the other hand. 
He noted that banks are charging
exorbitant interest rates because of
the increasing cost of doing business
and high MPR.
According to him, the only survival
alternative is for companies to boost
their working capital through
cheaper financing means. 
Adonri argued that equities would
have been the best option currently,
but noted that the primary market is
depressed due to uncompetitive
yield, crowding out effect of public
borrowing, eroded purchasing
power of investors and low foreign
investors’ confidence. 
He urged the incoming
administration to pursue policies
that would help improve
macroeconomic conditions to reduce
the cost of funds and peg interest
rates at a single digit. 
Chief Executive Officer of Wyoming
Securities, Tajudeen Olayinka, said
the reactions to the high-interest
rate regime from the corporate
world are normal.

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