FGN bonds are Federal Government of Nigeria securities issued under the authority of Debt Management Office (DMO).  Since 2003, DMO has been regulating the activities of the FGN bonds market, while the Central Bank of Nigeria acts as the Issuing House and the Registrar.  The bonds are listed and traded on the floors of the Nigerian Stock Exchange. The Central Securities Clearing Systems Ltd acts as the depository of the bonds listed on the Nigerian Stock Exchange.

• An introduction to FGN Bonds
• The Regulators/Agents in the FGN Bond Operations
• The licensed Primary Dealer and Market Makers (PDMMs)
• How to invest in FGN Bonds
• Bond Auctions, Operations and Results
• FGN Bond Issuance Calendar
• Current and Historical data on FGN Bonds
• Frequently Asked Questions(FAQs)
• Information on contractors and pension bonds

 

An introduction to FGN Bonds

About FGN Bonds

FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria issued under the authority of DMO and listed on the Nigerian Stock Exchange. The FGN has an obligation to pay the bondholder the principal and agreed interest as they fall due.

 

• FGN Bonds

When you buy FGN bonds you are lending to the federal government for a specified period of time. The FGN bond is considered as the safest of all investments in domestic currency securities market because it is backed by the ‘full faith and credit’ of the government. They have no default risk, meaning that it is virtually certain your interest and principal will be paid as and when due. The income you earn is exempt from state and local taxes.

The Government Issues Bonds for the following reasons

• To finance government deficits in a non-inflationary and sustainable manner
• To enhance fiscal discipline and for the management of monetary policies
• To restructure the existing debt stock of short term debt to longer term obligations
• To establish a benchmark yield curve, which acts as a reference for pricing other bonds issued by other bodies
• To develop the domestic bond market on a sustainable basis
• To enhance and deepen the savings and investment opportunities

 

• Special Purpose FGN Bond

 

Special Purpose FGN bonds are bonds issued to meet specific needs of the federal government. For instance, following the approval of Mr. President, special purpose bonds were issued to selected banks for settlement of N75 billion pension arrears in 2006.  Five deposit money banks participated in the private placement arrangement. In addition, in 2006 FGN floated bonds for the payment of debt owed to local contractors worth N91.7 billion. Recently, FGN indicated interest to raise funds through bonds for funding specific projects such as Methanol plant, revival of textile industry, terminal wages of workers, building of infrastructural facilities, etc.

 

Nature of FGN bonds

• Denomination: minimum subscription of N10,000.00 + multiple of N1,000.00 thereafter

 

• Yield: - Interest payment

• Fixed interest rates: Most FGN bonds have fixed interest rates which are paid semi-annually:
• Floating interest rates: Some FGN bonds (e.g. 3rd & 4TH tranches of the 1st FGN bonds) have floating rates of interest which fluctuates around a reference rate(NTB rates) on the basis of specified parameters
• There are also zero-coupon bonds(not yet in issue in Nigeria) whereby both interest and principal are repaid at the final maturity date of the bond

 

• Tenor: Minimum of two (2) years. There are bonds with maturities of 3. 5, 7 and 10 years, in issue and for the future we may have bonds with maturities of 15, 20,30 years or more

• Default Risk: FGN bonds as a sovereign debt are the safest investment instrument. Default risk is nil. The Government always pays what is due to subscribers on the agreed date

 

The licenced Primary Dealer and Market Makers (PDMMS)

These are banks and discount houses appointed by the DMO to act as authorized dealers in FGN bonds. These PDMMs are required among other functions to take up, market and distribute primary issues of FGN bonds, provide for secondary markets liquidity in FGN bonds by making two--way quotes in all market conditions. That is, they are obliged to buy or sell at these rates while dealing with customers. The fifteen (15) PDMMs institutions are:

•     Access Bank Plc
•     Afribank Nigeria Plc
•     Associated Discount House Ltd
•     Citi Bank Nigeria Limited
•     Consolidated Discount House Ltd
•     Express Securities Discount House Ltd
•     Ecobank Nigeria Plc
•     Fidelity Bank Nigeria Plc
•     First Bank Nigeria Plc
•     First City Monument Bank Plc
•     First Security Discount House Ltd
•     Guaranty Trust Bank Plc
•     Kakawa Discount House Ltd
•     Platinum Habib Bank Plc
•     Stanbic-IBTC Bank Plc
•     Union Bank of Nigeria Plc
•     United Bank of Nigeria Plc
•     Zenith Bank Plc

 

The Regulators/ and Government Agencies in the FGN Bond Operation

Debt Management Office (DMO): DMO is the Agency authorized by statute to issue FGN Bonds on behalf of the Federal Government. The DMO also regulates the activities of the bond market and the Primary Dealer/Market Makers.

Central Bank of Nigeria (CBN): The Central Bank of Nigeria acts as the issuing House and the Registrars for FGN Bonds.

The Nigerian Stock Exchange (NSE): FGN bonds are listed and traded on the Floors of the Nigerian Stock Exchange.

Central Securities Clearing Systems Ltd (CSCS): Acts as the depository of the bonds listed on the Nigerian Stock Exchange. Investors who opted for physical certificates at the issue must have their certificates deposited in CSCS before transactions on them on the floors of the Nigerian Stock Exchange.

Security and Exchange Commission (SEC): The apex regulator in the capital market; it regulates the activities of all operators as far as operations and their transactions in the market is concerned.
How to invest in FGN Bond

• Application forms can be obtained from any of the authorized dealers(PDMMs), or download from the DMO’s website
• Complete the application forms and submit through any of the PDMMs
• Common- price auction system is normally employed as opposed to multiple price auctions
• Payments for the allotment are payable in full on application
• Minimum of N10,000.00 and multiple of N1,000 thereafter
• Investors can also access the FGN bonds after the auction through the secondary market
• FGN bonds purchase is confirmed by registration in the depository (CSCS) or by issue of certificates
• Interest is paid semi-annually until the maturity date when the principal amount is repaid
• Payment of interest is through issue of interest warrant(cheque) or direct transfer to current or savings bank accounts
• Bondholders who do not want to hold the bonds until maturity date can sell them at any time on the floors of Nigerian Stock Exchange or Over the Counter (OTC), through, any of the PDMMs.

 

Bond Auction, Operations and Result:
Bond Auction:
This is a process where the bonds are offered to diverse investors for subscription. Upon subscription, allotment is made to investors at the lowest price/highest yield that clears
the market otherwise called marginal rate. The investor base for FGN bond is developing. It comprises mainly deposit money banks, foreign investors, pension funds, insurance funds, etc. Domestic individuals are yet to be fully involved in the market.

Auction Type:
Auction can be done through single pricing (Dutch Auction) or multiple pricing (Competitive Auction). DMO currently uses the Dutch Auction, which, is conducted on a yield, single price basis, where successful bidders are allotted bonds at the lowest price/highest yield that clears the market.

Markets:
The Primary or Secondary markets:. Investors can purchase bonds either from the Primary or secondary markets. The primary market is for securities that are newly issued in the market. These securities are sold directly to purchasers, usually through Primary Dealers/ Market Makers. On the other hand, Secondary market is for securities that are already issued and are traded among existing holders. Currently, Primary market offerings are issued through bond auctions, while PDMMs undertake or facilitate secondary market trading by making two-way quotes under all market conditions.. 

Frequency of Auction:
FGN Bonds of various maturities are auctioned on a monthly basis. Amounts issued vary depending on the quantum of bonds to be issued for the year.

Pricing:
 Common price auction system is often used instead of the multiple price system. Here, though each bidder quotes different yields, all successful bids are allotted securities at the marginal rate/cut-off price.

Bidding Agents:
 All investors submit their bids to appointed agents (Primary Dealers/Market Makers)
 who bid for their agents  and on behalf of their clients.

Schedule of FGN Bonds Issued to Date

Please see the insert document (Table A)

 

Historic and Current Data of FGN Bonds

 

1.         Domestic Debt Profile of Nigeria: An Overview 2000 – 2003

Table 1: Profile of Nigeria’s Domestic Debt. 2000 – 2003 (N Billions)

Composition of Debt	2000	2001	2002	2003
Treasury Bills	465.54	584.54	733.76	825.1
Treasury Bonds	430.31	430.61	430.61	430.61
FRN Development Stocks*	2.11	1.830	1.63	1.47
FGN Bonds*	-	-	-	72.56
Total	897.95	1,016.98	1,166.00	1,329.72

*Note: Federal Government of Nigeria (FGN) bond is successor to Federal Republic of Nigeria Development Stocks (FRNDS)

Table 1 shows Nigeria’s domestic debt stock as at December 2000 – 2003. In 2002, the debt stock was N1, 166.00 billion against N897.95 in 2000 representing 29.85% increase. It comprised 62.93 percent 91-day Treasury Bills, 36.93 percent Treasury Bonds (issued by the Federal Government and held by CBN to raise money at artificially low rates) and 0.14 percent Development Stocks (issued to finance various capital projects).

The Federal Government resuscitated the floatation of bonds on the Nigerian capital market in 2003, after 18 years, with the issuance of the 1st FGN Bonds 2003 series. The Debt Management Office was able to raise N72.56 billion in the issuance that was 48.3 percent subscribed.

The aim of the bond issuance was:

• To help government fund its deficits in a way consistent with macroeconomic stability and fiscal prudence and to subject it to the discipline of the market.

• To provide a benchmark yield curve which serves as  reference for bond issuance by other bodies like the state governments  or corporate bodies to facilitate rapid development of the economy.

 

• To create and sustain a liquid and deep secondary market which will impact positively on other bonds.

2.         FGN Bond 2004-2005
Table 2: Profile of Nigeria’s Domestic Debt. 2000 – 2005 (N Billions)

Composition of Debt	2000	2001	2002	2003	2004	2005
Treasury Bills	465.54	584.54	733.76	825.1	871.57	854.83
Treasury Bonds	430.31	430.61	430.61	430.61	424.94	419.27
FRN Development Stocks	2.11	1.830	1.63	1.47	1.25	0.98
FGN Bonds	-	-	-	72.56	72.56	250.83
Total	897.95	1,016.98	1,166.00	1,329.72	1,370.32	1,525.91

The FGN bonds issued in 2004 marked the beginning of restructuring exercise for the 91-day Nigeria Treasury Bills (NTBs) into longer-maturities. These bills had been a dominant instrument in securitizing outstanding Ways and Means Advances by the CBN. The restructuring was to help in solving problems inherent in the weekly issuance programme. These were roll-over and interest rate risk which engendered uncertainty about the future in the minds of investors. The successful implementation of the restructuring would reduce the volatility in the short-term rate market, sustain, revive and develop a deep and liquid secondary market for bonds.

 

• FGN Bond 2006

Table 3: Profile of Nigeria’s Domestic Debt. 2000 – 2006 (N Billions)

Composition of Debt	2000	2001	2002	2003	2004	2005	2006
Treasury Bills	465.54	584.54	733.76	825.1	871.57	854.83	695.00
Treasury Bonds	430.31	430.61	430.61	430.61	424.94	419.27	413.60
FRN Development Stocks	2.11	1.830	1.63	1.47	1.25	0.98	0.72
FGN Bonds	-	-	-	72.56	72.56	250.83	643.94
Total	897.95	1,016.98	1,166.00	1,329.72	1,370.32	1,525.91	1,753.26

As at December 2006, the structure of the domestic debt had changed with the Federal Government issuing more instruments with longer – maturities (182-day NTBs, 365-day NTBs and FGN Bonds) to replace part of the 91-day Treasury Bills. The total FGN securities outstanding increased from N897.95 in 2000 to  N1,753.26 billion in 2006 representing  95.25% increase.. The FGN Bonds accounted for 36.73%, from 0.14% in 2002, domestic debt securities outstanding in 2006. All this indicate the increasing emphasis on the FGN Bonds as instrument for funding FGN programme.

FGN Bond Issuance Calendar

2007 FGN Bond Issuance Calendar
Background:
The debt management strategy for 2007 is anchored on the imperative to continue to provide low cost funding for the FGN, subject to the containment of risks within acceptable limits.  Other objectives include:

• the need to maintain a prudent debt structure; promote and build a liquid and efficient market for government securities;
• increase reliance on market-determined instruments for domestic debt issuance;
• increase the transparency and predictability of primary market debt issuance; and
• Develop the market for long-term debt instrument and thereby creating a benchmark yield curve for government securities in Nigeria.

2007 FGN Bond Issuance Objective:
The objective of the issuance calendar is to enable market players plan their cash flow so as to maximize benefits from the FGN Bond issuance programme.

In sustaining the efforts to develop the Nigerian Bond Market, DMO plans to issue N446 billion 4th FGN Bond in 2007.  The maturities of the bond are 3, 5, 7 and 10 years while the purpose for the bond issuance includes the following:

• Restructuring of N120 billion 365-day NTBs into FGN Bonds of longer maturities
• Refinancing N61.00 billion 2nd FGN Bond maturing in 2007
• Funding budget deficit of N200 billion for the 2007 fiscal year
• Balance of N63 billion 5-year Special FGN Bond for the securitization of local contractors’ debt

Features of the 2007 FGN Bond Issuance
The 2007 Bond issuance have the following features:

• Only fixed coupon instruments are being issued
• Competitive bidding process based on common pricing system continue to be used
• The auctions is monthly as in the past
• Submission of bids takes place in one day, and within a specified timeline while settlement takes place two days after.  Consequently, there is no opening and closing days for submission of tender/application forms as done in the past

The DMO’s portfolio strategy is aimed at creating benchmark issues around the 3 and 5 years maturities, while gradually extending the domestic debt portfolio toward longer maturities. 

In 2007, DMO may introduce a re-opening system to increase liquidity and create benchmark issues as well as make bonds with identical maturities and coupon rates fungible.

The 2007 FGN Bond Issuance calendar has been fashioned and designed to ensure availability of bonds of various maturities to cater for the different appetite of investors, (See Tables 3 and 4). 

Table 4: 2007 Quarterly Issuance Programme for the 4th FGN Bond

S/N	Quarter	Amount	Tenor
1	1st quarter 2007	N110 billion	The maturities has been determined to reflect both DMO strategic objectives and market preference
2	2nd quarter 2007	N110 billion
3	3rd quarter 2007	N110 billion
4	4th quarter 2007	N116 billion
Total Amount to be Issued for the Year N446 billion

 

Table 5:  2007 FGN Bond 1st Quarter Calendar

S/N	Month	Amount	Tenor
1.	January 2007	N40 billion	3-year
2.	February 2007	N35 billion	5-year
3.	March 2007	N35 billion	7-year
Total For the 1st Quarter                     N110 billion

 

 

Frequently asked questions

What is a bond?

A bond is a loan and the investor or holder of the bond is the lender. When you purchase a bond, you are lending money to a government, local government council, state government, federal agency or a corporation, known as the issuer. The government uses it to fund budget deficit, for instance, or to build roads, electric power stations, finance factories, etc. When you purchase a bond, in return the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it ‘matures’

 

What is the difference between a bond and a stock?

The key difference between stocks and bond is that stocks make no promise about dividends or returns, but when the Government Issue a bond, it guarantees to pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much you are going to get back. That is why bonds are also known as ‘fixed-income’ investment – you are sure of a steady payback or yearly income.

The buyer of stocks or shares in a company has purchased part of the equity and becomes part –owner. He is only entitled to dividend declared by the company when it makes profit.

What are the types of Bonds?

• Sovereign Bond(such as FGN Bond)

 

When you buy FGN bonds you are lending funds to the federal government for a specified period of time. The FGN bond is considered as the safest of all the investments because it is backed by the ‘full faith and credit’ of the government. They have no default risk, meaning that it is virtually certain your interest and principal will be paid as and when due. The income you earn is exempted from state and local taxes.

• State and Local Government Council Bonds

 

When you purchase state and local government council bonds you are lending to the issuers who promise to pay you a specified amount of interest (usually semi - annually) and return the principal to you on a specific maturity date. State and local government bonds are debt obligation issued by the state government, local government councils and other governmental entities to raise money to build schools, roads, hospitals as well as other projects for public good.

 

• Government Sponsored Enterprise Bond

These are bonds that help support project relevant to public policies, such as helping certain groups, such as farmers, homeowners, students, etc to raise money for financing specific projects. These bonds do not carry the full-faith and-credit of government. The investors are likely to hold them in high regard because they have been issued by a government agency.

 

• Corporate Bond

Corporate bond are debt obligation issued by private or public corporations. The corporations use the funds for building facilities, purchase of equipment to expand the business, etc. When you purchase corporate bond, the corporation promises to return your money, or principal at maturity date, but you are being paid interest semi - annually. The interests you receive are taxable. Corporate bonds do not give you an ownership interest in the issuing corporation.

Are there Risk and Reward in investing in bond?

Any time you lend money you run the risk that it will not be paid back – credit risk. Another source of risk for certain bonds (bond with call option) is that your loan may be paid back early, or ‘called’ this is known as prepayment risk. When you buy a bond, the prospectus will indicate whether a bond is callable and give you a ‘yield-to-call’ figure. The greatest danger for a buy –and-hold bond to an investor is rising inflation rate – inflation risk. A rise in inflation makes prices fall and yields-or interest rates-rise. However, inflation risk, credit risk and prepayment risk are all figured into the pricing of bonds. The more the risk the higher the yield. Investors demand higher yields for longer maturities, as the longer you tie your money up in a bond the more at-risk.

 

Why should I invest in FGN bond?

• Retirement
• Starting or expanding a business
• Settlement after apprenticeship
• Pay children school fees in future(e.g for University education)
• Building a house
• Future projects by town unions, associations, student union
• To fund future social events such as Marriages and weddings, etc
• Settlement of pension insurance obligation( for Corporate Fund Managers), etc

 

What is the attractiveness/benefits of FGN Bonds to the investors?

• It serves as risk-free investment
• It is income is tax exempt
• It provides relatively high and stable returns
• The principal element ( collected at maturity) can be used as collateral for securing credit facilities from banks
• Bondholders that want cash can trade the bonds on the floor of Nigeria Stock Exchange(NSE) for immediate cash before maturity
• It qualifies as liquid assets for banks from two years to maturity

 

 

What are the benefits of FGN bonds to the Economy?

• It fosters economic development by promoting the use of lon-term funds for lon-term investment in the economy
• It serves as an efficient way of mobilizing domestic financial resources for productive investment in a non-inflationary manner
• It allows self reliance of the country by reducing over reliance on short-term borrowing form CBN & commercial banks
• It provides a basic infrastructure for the development of the financial system and the overall economy
• It serves as a diversified portfolio investment outlet to corporate and individual investors

 

What are the benefits of FGN bonds to the Government?

• It helps government funds its deficits in a non-inflationary manner
• It provides benchmark yield-curve for pricing other securities/bonds
• It engenders rational management of Government’s fiscal and monetary operations
• It provides the basic infrastructure for the development of the financial system and the overall economy
• It strengthens the implementation of monetary policy by the Central Bank of Nigeria
• It introduces transparency, discipline and stability in the financial system

 

What is dematerialization of bond certificates?

It is a term which describes a shift from issuance of physical certificate to an electronic form. It involves the use of a depository, in this case, the Central Securities Claering Systems Ltd(CSCS) which provides the platform for the securities.

Although DMO still issues physical certificates on request, modern securities trading system de-emphasizes the use of physical certificates. Advancement in electronic communication and custodian services allow book-entry records and trade verification which has made trading more reliable and easier to manage than the use of physical certificates.

How can I be aware of the forth coming issues?

• National Dailies
• DMO Website -  FGN bond Issuance Calendar

 

Information on contractors and pension bonds

The report on FGN bonds issued for settlement of pension arrears and local contractors are provided as Special FGN Bonds in the ‘Schedule of FGN Bonds Issued to Date’ (Bond Auction, Operations and Result)