Corporate debt issuance in Nigeria is expected to remain robust throughout 2021 even as interest rates begin to rise from last year’s record low levels, according to a new research by GCR credit ratings. Nigerian corporates issued a record N1.02 Trillion (USD 2.69 Billion) of local currency debt instruments in 2020, the highest since at least 2014, as a record low interest rate environment spurred appetite for borrowing.
Going forward, favourable demand and supply-side dynamics are expected to continue to be supportive of local currency debt issuance in Nigeria, according to Akintunde Majekodunmi, CEO of GCR Ratings, who expects debt issuance in 2021 to remain at the N1 Trillion level attained last year, despite rising interest rates. “In recent months, interest rates, as represented by Nigerian treasury bill yields, have increased significantly, but currently remain below year-end 2019 levels,” Majekodunmi, a former Vice President at Moody’s said.
Companies in the financial services and industrial sectors, which were the main issuers of debt accounting for 42 percent and 26 percent of total issuance, respectively in 2020, are expected to continue being main issuers over the next 12 to 18 months, according to GCR. Issuing debt instruments is increasingly becoming a viable funding source for Nigerian entities. Companies are diversifying their funding base through the issuance of CP and/or bonds.
On account of the challenging operating environment, commercial banks in Nigeria have been proactively de-risking their balance sheets by reducing the amount of credit extended to the private sector. Banking system loan growth was 17.6% over 2020, however, once the impact of the depreciation of the Naira on foreign currency denominated loans is accounted for, 2020 banking system loan growth was fairly flat.
Additionally, given uncertain and challenging operating conditions as a result of the COVID- 19 pandemic, several Nigerian companies have sought funding to bolster their liquidity profiles and/or working capital. Further, in order to take advantage of low valuations and mitigate uncertainties in their supply chain, some companies are using this opportunity to raise funds in order to invest in growth strategies and/or vertically integrate.
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