Nigeran Companies Embrace Modigliani and Miller Debt Legacy

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The traditionalist theorist had assumed that too much debt is inimical to the value of a firm, arguing that in most cases it led to bankruptcy and liquidation.

However, that ideology was dismantled over a century ago by two economic scarlets, Francisco Modigliani and Metro Miller, who opined that whether companies funded themselves with debt or equity was irrelevant.

The M-M theory (an abbreviation for their names) assumed that in the world without friction-such as taxes, imperfect information, inefficient markets- it is irrelevant whether it financed its growth by borrowing, by issuing stock shares, or by reinvesting its profit.

They were of the view that the market value of a firm is simply the present value of its future earnings and its underlying assets, independent of its capital structure.

Of course, Modigliani and Miller went ahead to win the Nobel Prize in corporate finance and economics.

A few years later, however, both tweaked the theory and agreed interest on debts are tax deductible and that the value of an indebted company is actually higher than that of an unlevered one.

Interestingly, the theory is shaping the creditworthiness of corporate across the globe and Nigerian companies are falling in love with M-M theory as they are tapping the debt market with alacrity to fund their expansion plans, strengthen working capital position, and refinance existing debt.

Last year, Nigerian companies took advantage of the low yield environment and buoyant system liquidity. The exclusion of local investors from the OMO market had sent the net treasury bills crashing. Yields had hovered around 5-6 percent.

The largest companies that cut  different sectors have a combined borrowing (both long and short) of N1.93 trillion in their balance sheet, which is 0.86 percent of the gross domestic product, according to data gathered by MoneyCentral.

Notably, the cumulative combined total liability stood at N5.35 trillion in March 2021, that is 1.54 percent higher than 2020’s N5.74 trillion.

More than N801 billion  was issued in corporate commercial paper (CP) in 2020 from N467.6 billion  in 2019, according to Chapel Hill Denham.

Dangote Cement, the most capitalized company in Africa’s largest economy had raised N100 billion, one of the largest ever commercial issuances in the country.

MTN Nigeria, the largest telecommunication company, issued N100 billion CP, While the Nigerian Breweries had issued CP of N91.20 billion.

Analysts are of the view that rising bond yields that started in 2021 means entities will pay more for borrowing from the capital market.

The party is over for equity and end of low  rates while bond is in vogue as there has been strong demand for higher yields and the need to attract foreign interest in Nigerian equities amid a dollar shortage.

In March, firms including MTN Nigeria and Nigerian Breweries were forced to raise the rates offered on new debt issues due to “aggressive bids” by investors seeking higher yields, Stanbic IBTC Asset Management, said in a note to clients. That same month, firms had raised N170 billion CP.

“Though interest rates have moved up, it is still relatively appealing to blue-chip firms who are borrowing from depositors rather than the banks,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management Limited.

The Nigeria 10 Years Government Bond has a 12.937 percent yield as at June 10.

The Nigeria 10 Years Government Bond reached a maximum yield of 15.856% (4 December 2018) and a minimum yield of 4.048% (3 November 2020)

Dangote Cement is contemplating debt funding options under a planned, N300 billion bond issuance programme.

The cement maker has N413.15 billion total borrowing on its balance sheet as at March 2021, which is 19.49 percent lower than 2020’s N513.92 billion.

FMDQ Securities Exchange Ltd had announced the admission for listing the BUA Cement Plc N115 billion series 1 fixed rate senior unsecured bond under its N200 billion bond issuance programme.

NOVA Merchant Bank recently concluded the listing of its N10 billion 7-Year Subordinated Unsecured Bond on the Nigeria Stock Exchange.

Analysts at United Capital said the central bank has continued to send the signal to the debt markets again that the rate reversal party may be coming to a pause.

“Interestingly, the CBN sold 1.9x (N179.3 billion sold vs N93.1 billion offered) of what it initially offered, taking advantage of the huge bids from investors at the auction,” said the analysts.

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