CAPITAL SOLUTIONS REQUIRED

Nigeria 2017 | FINANCE | REVIEW: CAPITAL MARKETS

The NSE, Sub-Saharan Africa's second-largest bourse after the Johannesburg Stock Exchange (JSE), is also seeking to broaden its scope at a time when would-be investors have been spooked.

Nigeria, like all oil producers, has seen its economic apple cart upended by limp prices. Indeed, 90% of total forex earnings stem from the viscous commodity. Yet proving the old adage that what doesn't kill you makes you stronger, its capital markets, a.k.a. the Nigerian Stock Exchange (NSE), have opted to innovate its way toward picking the low, and high-hanging fruit. What's more, despite a hefty recent downturn at the bourse, a lengthy hiatus on the IPO front may actually be coming to an end, of which more later.

Established in 1960 as the Lagos Stock Exchange, the exchange was renamed the NSE in 1977, and as of September 30, 2016 had a total market capitalization (MCap) of USD54.13 billion, down 2.8% YoY (of which the USD31.91 billion accounted for by equities had lost 9.27% YoY ). Identifying itself as a viable international address for best practices, the bourse, recipient of the “Best Corporate Social Responsibility Award” at the 2015 African Business Awards, is a member the International Organization of Securities Commissions (IOSCO) and the World Federation of Exchanges (WFE), among others. Business is done from 9:30am to 2:30pm (West Central Africa time), with equities traded on 12 indices, of which the NSE 30 Index is the benchmark performance gauge.

Trading on Evolution

At the end of 2015, the NSE commenced implementing its 2015-2019 Strategic Plan, which CEO Oscar N. Onyema explained was in part about increasing “our geographical footprint from Nigeria to Africa. We decided we would be a platform not only for the listing of Nigerian corporates, but also for Nigerian corporates operating beyond Nigeria around the continent, as well as the many African international corporates operating in Nigeria.” Incidentally, the NSE is moving toward its own demutualization, which will transform it into a shareholder-driven entity, and is keen to monetize its market service operations.

The NSE, Sub-Saharan Africa's second-largest bourse after the Johannesburg Stock Exchange (JSE), is also seeking to broaden its scope at a time when would-be investors have been spooked, and in 2017 may reportedly introduce an independent clearing house for derivative trading, thus becoming more attractive as an entry point for foreign funds into the wider region, while also generating greater liquidity.

The Nigerian Securities Exchange Commission (SEC), a state agency tasked with regulating and expanding local capital markets, has signed an MoU with its Moroccan counterpart, Autorite Marocaine Du Marche Des Capitaux (AMMC), as part of broader bilateral agreements that will, among other matters, explore the trading of sharia-compliant instruments. Similar agreements had already been penned with Angola, Ghana, Kenya, South Africa, Tanzania, Uganda, Mauritius, China, and Malaysia. Yet with a 16% slide in the first five weeks of 2016, as foreign funds fled due to a devalued naira and slumped crude prices, the NSE cannot discount the value of domestic investors for trading volumes, and, currently, those account for 75% of the total market capitalization of listed companies.

Looking to SMEs...

As of December 2016, the SEC was in the process of rethinking the stratification of the bourse to render it more appetizing to SMEs by easing listing stipulations. Few SMEs to date have opted for listing, despite, and in truth in some cases because, of the transparency and high corporate governance standards it requires. Historically, the NSE has featured the Premium Board, the Main Board, and the Alternative Securities Market Board and it has been hard for companies to list under the existing boards. The new system would see the bourse split into tier one, tier two, and tier three markets, allowing potential entrants to select the optimal trading arena for their circumstances with lesser licensing requirements in each tier. The NSE was keen, however, to stress that this move did not signal lax standards of operation, and has in place a mandatory corporate governance rating system (CGRS) for companies trading on the main board. Regarding the latter, in step with, “its commitment to promoting Africa's biggest companies, as well as influencing the economic growth and development of Nigeria,” the NSE launched the Premium Board Index on August 25, 2015. Constituent companies are obliged to maintain a minimum free float of 20% of their issued share capital, or else, “a free float value equal to or above NGN40 billion (USD126.9 million as at Dec. 7, 2016).” Those companies to have immediately qualified for this index at the time were Dangote Cement Plc, FBN Holdings Plc, and Zenith International Bank Plc, the respective MCap of which were at NGN2.87 trillion, NGN277.7 billion, and NGN587.43 billion, respectively.
As Onyema continued, “We provide a platform for raising capital, but more importantly, when you are listed on the NSE you have a credit rating, which allows access to other types of financing at better rates.” Another vital benefit of listing that hopefully more SMEs will pursue “is that typically the founder of a company wants to pass control from one generation to another.”

...And Key IPOs

The NSE had shed 4% by October 21, 2016, marking a leaden 15-year low in USD terms. More revealingly, despite the theoretical advantages outlined in previous paragraphs, there has been no IPO activity since 2009 as foreign investors stayed sidelined. And now, according to the Ministry of Petroleum, without greater exploitation of Nigeria's reserves, by 2020, the nation stands to face absolute production declines, inflicting bluntforce trauma to the broader economy. Consequently, the government is exploring the listing of massive state oil company NNPC in a bid to streamline the entity through rigorous private sector rationalization.
The NNPC is by no means alone in the IPO stakes. Bank payment processor Interswitch, which has a debit card brand in Nigeria, is considering a dual IPO in 2017 on the Lagos and London exchanges as part of footprint expansion into fresh African markets. Telco MTN has opened talks with the SEC also for listing in 2017, with shares to be available in three tiers. Nigeria's leading airline Arik has earmarked a USD1 billion share offer and potential secondary listing on the London Stock Exchange (LSE), not least in pursuit of hard currency that would curb its need for growth dependent on internally generated cash or debt.

Recent Performance

The NSE's flagship NSE All Shares Index shed 17.4% in 2015 to close at 28,642 points having commenced the year flattish. The benchmark NSE30 index had lost 17.63% for the year. Negative factors damning the print had included political risk, currency volatility, and the vague status of international oil prices. The latter two factors, of course, prevail today. And moving to 2016 (as of December 6, 2016), the NSE All Shares Index had peaked at 32,075.25 on June 23. Yet fast-forwarding, the bear was truly on the prowl as of 3Q2016, due to naira depreciation and oil woes. The average daily trading volume across all instruments in 3Q2016 was 303.48 million, down 20.81% in the 52-week period of October 2015 to September 2016. Meanwhile, the average daily trading value, at USD8.14 million, had shed 31.04% for the period. NSE-30 Index and NSE All Share Index respectively lost 10.82% and 9.23%. The MCap of the bond market, at USD22.20 billion, had climbed 8.18% for the period.

In brief, the travails of oil and a weakened currency buffet Nigeria's capital markets as they do the broader economic matrix. Yet the NSE is rooted in stringent regulation, while further broadening of its instrument offering in the near term will enable it to face the headwinds.