The Federal Government of Nigeria (FGN) has introduced a Domestic US Dollar Bond, an innovative financial instrument designed to attract both local and international investors.
This bond is part of the government’s financing initiatives and will remain open until August 30, 2024, giving investors a sufficient window to participate in this offering. These bonds represent an intriguing financial instrument that blends the stability of the US dollar with the unique dynamics of Nigeria’s economy. Here’s a comprehensive look at what you need to know about Nigeria’s Domestic US Dollar Bonds.
This article aims to provide a comprehensive overview of what the bond entails, its purpose, and how investors can participate.
What is Domestic FGN US Dollar Bond?
Nigeria’s Domestic US Dollar Bond is a debt security issued by the Federal Government of Nigeria, denominated in US dollars but aimed primarily at domestic investors. Unlike traditional foreign debt instruments which are usually aimed at international investors, these bonds are intended for Nigerian investors, allowing them to invest in dollars without needing to venture into international markets. This approach aims to tap into the local capital market while providing a dollar-based investment option..
For Nigeria, these bonds offer an opportunity for domestic investors to gain exposure to US dollars while participating in the local bond market
Purpose and Use of Proceeds
- Primary Purpose: The bond is designed to raise funds for critical sectors of the Nigerian economy. The specific projects and sectors to be financed will be approved by the President of Nigeria based on recommendations from the Honorable Minister of Finance and Coordinating Minister of the Economy.
-
- Diversification of Funding Sources: By issuing bonds in US dollars, Nigeria can tap into a broader pool of investors who are looking to invest in dollar-denominated assets. This diversification helps the country to manage its debt profile more effectively and reduces its reliance on naira-denominated debt.
- Attracting Foreign Investment: Even though the bonds are issued domestically, denominating them in US dollars can attract foreign investors who are interested in dollar-based returns. This can help to stabilize the country’s foreign exchange reserves and provide additional liquidity to the economy.
- Currency Risk Management: For investors in Nigeria who are concerned about naira devaluation, US dollar bonds offer a hedge against currency risk. This makes them an attractive investment option in an economy with volatile currency movements.
- Appropriation and Oversight: The allocation of funds will be subject to appropriation by the National Assembly, ensuring that the proceeds are used for essential development projects as outlined in the government’s economic strategy.
Issuer and Programme Structure
- Issuer: The bond is issued by the Federal Government of Nigeria. This means that the Nigerian government is responsible for the bond and will be the entity making interest payments and eventually repaying the principal amount to investors.
- Programme Size: The total programme for these bonds is set at US$2 billion. According to Wale Edun, finance minister, the Federal Government aims to raise a total of $2 billion from the domestic dollar bond programme. However, it is only issuing $500 million in its series 1 programme. This programme is designed to be issued in multiple series over time, with each series offering different terms and conditions.
- Issuance Method: The bonds will be issued through an “Offer for Subscription” at a fixed price. This means investors will buy the bonds at a set price determined by the government, rather than through an auction process or other pricing mechanisms.
Series 1 Programme Details
The first tranche of the Nigeria’s Domestic US Dollar Bond, known as Series 1, is structured with several key financial details. The target size for this initial tranche is up to US$500 million, which represents the maximum amount the Nigerian government intends to raise through this particular bond issuance. The tenor of Series 1 is set at five years, meaning that investors will receive their principal investment back after a period of five years from the issuance date.
During this time, the bond will accrue interest at a coupon rate of 9.75% per annum, with interest payments made semi-annually. This means that bondholders will receive interest payments twice a year at the rate specified. To invest in Series 1, the minimum subscription amount is US$10,000, with additional investments permitted in increments of US$1,000. This tiered subscription structure allows for varying levels of investment and aims to attract a broad spectrum of investors, from individual investors to larger institutional entities.
Meanwhile, in an unprecedented feat, Nigeria Raises over $900m in Domestic FGN US Dollar Bond for the first Series 1 Programme compare the target size for US$500 million with a 180 per cent subscription rate, thus, marks a historic milestone as Nigeria’s first-ever domestic USD-denominated bond.
Eligibility and Taxation of Nigeria’s Domestic US Dollar Bond
The Domestic FGN US Dollar Bond is designed to be inclusive, allowing a diverse range of investors to participate. Nigerians resident in Nigeria are eligible to invest, making it accessible to individuals living within the country who are looking to diversify their investment portfolios. Nigerians in the diaspora can also take part, provided they have foreign exchange savings. This inclusion acknowledges the significant pool of Nigerians living abroad who are interested in contributing to their home country’s economic development while earning returns on their investments. Additionally, the bond is open to foreign and institutional investors, thereby broadening the investor base and enhancing the bond’s attractiveness on the international stage.
In terms of taxation, the Domestic FGN US Dollar Bond offers substantial benefits. Income from investments in this bond is exempt from Companies Income Tax, Personal Income Tax, and Capital Gains Tax. This comprehensive tax exemption is a major advantage, as it significantly increases the net returns for investors. By eliminating these taxes, the bond not only becomes a more attractive investment option but also aligns with global practices of offering tax-efficient products to enhance investor appeal. This tax advantage is particularly beneficial for institutional investors and high-net-worth individuals who seek to maximize their investment returns while mitigating tax liabilities.
Investment Benefits and Taxation
Tax Benefits:
One of the significant advantages of investing in this Domestic US Dollar Bond is its tax exemption status. Interest income from the bond is exempt from Companies Income Tax, Personal Income Tax, and Capital Gains Tax. This tax efficiency enhances the bond’s attractiveness, particularly for investors seeking to maximize their net returns.
Pension Fund Eligibility:
The bond is eligible for inclusion in pension fund portfolios, making it a viable option for pension fund managers looking to diversify their investments and achieve higher returns.
Listing and Trading
Once issued, the bonds will be listed on the Nigerian Exchange Limited (NGX) and the FMDQ Securities Exchange Limited (FMDQ). This listing allows investors to trade their bonds in the secondary market before maturity, providing liquidity and flexibility. The Central Bank of Nigeria has also granted the bond liquid asset status, making it eligible for inclusion in the calculation of liquidity ratios for banks in Nigeria. This designation adds to the bond’s appeal, particularly for financial institutions.
Bank Verification Number (BVN): Investors, including those in the diaspora, are required to provide their Bank Verification Number (BVN) as part of the application process, ensuring compliance with regulatory requirements.
Oversubscription and Refunds:
In the event of an oversubscription, the DMO may seek approvals to accommodate additional demand. If such approvals are not granted, excess funds will be refunded to the subscribers’ accounts from which the original subscription was made.
Subscription Process
How to Subscribe:
Investors can subscribe to the bond through an electronic e-portal or by submitting physical application forms to designated Issuing Houses, Financial Advisers, and Receiving Banks. It is crucial for investors interested in using funds from domiciliary accounts to ensure that these funds have been held for at least 30 days prior to the application date. This stipulation helps in verifying the legitimacy of the funds.
Payment Method:
Subscriptions must be made through electronic transfers into designated accounts. Cash payments are not accepted for this bond, ensuring a secure and traceable transaction process. Investors should be aware that standard corresponding bank charges may apply during the investment process, which is common in financial transactions involving electronic transfers.
Application Form:
The application form for the bond can be obtained via the Debt Management Office (DMO) website or from Issuing Houses, Financial Advisers, and Receiving Banks. This process facilitates access to the bond for potential investors. On the application form, it is stated that payment shall only be made through the Nigerian banking system and electronic transfers into the designated accounts to be provided upon allotment.
“No cash deposits will be accepted under this transaction,” the form says.
Risks and Considerations
- Currency Fluctuations: While the bonds are issued in US dollars, the underlying economic conditions of Nigeria can affect their attractiveness. Significant fluctuations in the naira can impact the overall investment climate.
- Economic Stability: Investors need to assess Nigeria’s economic stability, including factors such as inflation, political risk, and fiscal policy. These elements can influence the performance and return on US dollar-denominated bonds.
- Regulatory Changes: Changes in local or international financial regulations can affect the issuance and trading of these bonds. Keeping abreast of regulatory developments is crucial for investors.
In conclusion, Nigeria’s Domestic US Dollar Bonds present a unique investment opportunity, blending the stability of the US dollar with the potential of Nigeria’s economic growth. With tax benefits, a diverse investor base, and a structured issuance process, these bonds offer a compelling option for both local and international investors.
