Search Site: OnlineNigeria

EXPLORING NEW FRONTIERS: …How Nigerian Companies Can Tap The Global Capital Market

The growth trend of the Nigerian capital market has been quite phenomenal in the last five years and there seem to be no end in sight.

…Growth Spurt.
The growth trend of the Nigerian capital market has been quite phenomenal in the last five years and there seem to be no end in sight. A combination of positive economic and political factors as well as smart regulatory policies in recent times has helped to ignite the momentum and there is no reason to expect that this process would be short-lived, unless something catastrophic occurs in the political terrain.

A critical analysis of the current reform process and transformation occurring in the financial sector would reveal that tremendous long-term upside potential might lie in the horizon for savvy investors and viable companies.

Liquidity and capitalization have improved markedly. The number of listed companies is now almost 300, just as more public quotations are in the pipeline. The recent effort by the Nigerian Stock Exchange (NSE) to stimulate emergence of fixed income instruments such as Asset-backed and Mortgage-backed securities as well as Options and Derivatives could stretch supply even further thereby bolstering capitalization in the long run.

The capital market world-wide is a proven resource for companies to mobilize financial assets from the investing public cost-effectively either by issuing debt (selling bonds, preferred stocks or debentures) or offering equity (selling common shares), to enable them execute large-scale projects and implement long-range growth strategies, as opposed to securing bank loans or lines of credit.

…Investor Fatigue.
As healthy Nigerian companies recognize this obvious advantage, they are bound to head to the Nigerian Stock Exchange to raise money. If the supply trend continues, without a concomitant demand, due to investor fatigue or depletion of investable assets, market valuation and liquidity level could suffer as companies face the challenge of capital-drought, which would unleash a strong competitive drive for investors' attention.

The management of NSE insists that as long as there is supply of good quality stocks in the Nigerian market, demand would rise to the occasion. Thus far, there is no reason to doubt that, what for the spate of oversubscription of newly quoted stocks in the last 6 months.

Rather than wait until the hypothesis of capital-drought is put to test in the Nigerian market, it would be wise for viable companies in the face of growing supply to start exploring avenues for tapping the global capital market and taking their game to a new level. An overview of actively traded companies in Nigeria actually reveals that there exist some quality international prospects, with topnotch management, consistent impressive performance and leading market-position.

I say this because the time is near, given the rapid transformation occurring in Nigeria and the NSE agrees. The Director General Dr. Ndi Okereke-Onyuike during a recent investor road show in Washington, DC indicated that the exchange has identified several potentially qualified companies in Nigeria that could benefit from stepping into the global capital market, so what are they waiting for?

What are the concrete avenues for actually harnessing the international capital market? Most Nigerian companies are already used to sourcing debt financing from private and multilateral sources abroad with limited success, because they feel that funds could be secured easily for longer duration, in larger sums and at relatively lower interest rate compared to local sources, whereas the private equity and capital market sources are actually relatively cheaper but less-explored route. This will definitely change in a not-too-distant future if Nigerian companies want to become successful regional and international players in a fast-globalizing market environment.

…International Instruments - ADR/ GDR
Global Depositary Receipt (GDR) and American Depositary Receipts (ADR) is a financial instrument pioneered by J. P. Morgan in 1927 to enable US investors buy the shares of British retailer - Selfridges. Since then hundreds of foreign companies have sold shares through this means. ADR is simply stocks of foreign companies quoted in international markets say London, New York or Frankfurt based on the securities regulations of the host country.

It is an avenue through which both small, medium sized and large companies can access investment capital beyond their immediate frontier. For now the New York and London markets seem to be fertile grounds for foreign securities. ADR/GDR shares are usually priced to reflect market conditions and quoted in the currency of host country where the instrument is traded on the floor of the exchange, in the secondary market or over the counter. The shares earn dividend but foreign shareholders do not have voting or preemptive rights.

Another advantage of issuing ADR/GDR is that companies and foreign investors could avoid unpredictable currency fluctuation. The downside for some companies is that foreign investors will hold a chunk of their shares. Since the foreign investors do not possess voting rights and the dynamics of the shares abroad hardly influence the value at home, it makes one question whether the foreign ownership exerts any negative influence per se on the company, except to compel management to be more transparent and accountable to a diverse investor community, leading to an ultimate win-win situation for everyone involved.

The fact that valuation of most emerging market companies vis-a-vis that of advanced countries are low makes it imminent that the portion of shares listed as ADR is also quite small, usually in tens or hundreds of millions rather than billions of dollars. As a consequence, most emerging market ADRs trade under the radar screen of large fund managers, in fact some are non-sponsored, which means not issued by the parent company that initially listed the stock at home.

According to Bank of New York, there are over 120 ADRs of African origin in the US including well-known names like Anglo-Gold Ashanti, Old Mutual, South African Breweries, and African Gem Resources. Only one company from Nigeria - United Bank for Africa (UBA) has successfully issued GDR as an instrument for mobilizing capital from the global arena.

…African Public Company Conference.
To begin addressing this inherent lack of exposure, an investor-conference for African public companies is planned for June in New York Harvard Club by a consortium of Investment Advisory firms. Evidence suggests a growing interest in African public companies amongst fund managers, due to the apparent capital-glut in advanced markets over the last 5 years. Therefore this forum will allow US and international fund managers to hear directly from African company executives.

During the last Wharton African Business Conference in the University of Pennsylvania, I asked Bayo Ogunlesi, former Global Head of Investment Banking and now Executive Vice Chairman in investment banking powerhouse - Credit Suisse First Boston (CSFB), why there are not more African ADRs and how companies from the continent could harness the international capital market. His answer was simple -- the capitalization of most African companies is rather small, besides the cost involved might be prohibitive for such companies, which is true. But it is worth pointing out that the average size of most foreign ADRs are actually in the small capitalization range, even at that, a lot of Chinese, Indian, Turkish and Latin American companies have successfully issued ADRs in the United States.

Aside from the capitalization problem, a key question confronting African companies is whether international; fund managers would have an appetite for their shares ones it starts trading abroad. It is rather early to unequivocally say yes, given the historical apathy of fund managers to African companies and the lack of information about viable investments in the continent. On the other hand, assuming qualified companies from African are truly geared on issuing ADRs, most would run into roadblocks for the mere fact that they might not know the right people/companies to help them or have the right strategies to accomplish such goals. Moreso, their operations and financial statements would be open to increased scrutiny, whilst not up to international standard.

Therefore, information asymmetry and low corporate governance standard in Nigeria might present serious obstacles to prospective companies hoping to exploit this opportunity.

…Steps Forward.
That said, the next step for a robust public company in Nigeria to plug into the global capital market would be to issue American Depository Receipts or Global Depositary Receipts. But a successful effort must start well in advance and include the following major steps:

a) Continued improvement in level of transparency and corporate governance by the regulatory agencies in Nigeria.

b) Improvement in accountability and quality of financial record keeping and attainment of global best practice by African blue chip companies.

c) Hosting of information sessions for on listing and trading procedures both in Nigerian and abroad for senior management of public companies, investment banks, and stock brokerage firms.

d) Strong encouragement by the NSE and Securities and Exchange Commission (SEC) for companies to explore this avenue by linking with service providers and advisory firms abroad.

e) Utilization of ADRs as an avenue for reaching out not only to international fund managers, but to African/Nigerian individual investors in the Diaspora.

f) Nigerian public companies must be able to tell a good story about themselves to the international investment community. There is no more qualified entity to do this than the management. Not the government or NSE can do a better job in sensitizing international investor about investment opportunities within the companies.

Nothing could be farther from the truth, that African/Nigerian governments must put their house in order before striving to attract foreign investments. A well regulated and conducive market environment at home would only help breed more healthy companies that could indeed be attractive to foreign portfolio investors, who might be ready to invest through the GDR/ADR mechanism. You must agree that this is one of the genuinely fair means of allocating capital in today's financial world.