FBN and the planned 2009 Bond Offer (051009)Monday, October 05, 2010
Conversation with Investors:
FBN is the stock that has established footprints in the Nigeria financial system. Over time and more recently, it appears to have become a stock that has turned itself from an investor delight to an investor dislike over a period of steady wrong decision making.
FBN is a great company but with an ill-equipped management in place! The management of the company certainly has no excuses given the realities and positioning it has.
We all knew the incident of 2006 when FBN came to the market to raise N100 Billion (thru rights and IPO) and in the process raised more than N700 billion. Money poured in from all over the world but unfortunately FBN and it regulators said it can only keep N250 billion and not a kobo more.
The Director General of the Nigerian Stock Exchange – Prof. Ndi Okereke-Onyuike was contacted through a series of emails, met with her one-on-one during one of her many road shows in the then gloomy days in Atlanta and made her see reasons why FBN should keep that N700 billion. The then SEC Director General, Musa El 'Faki was contacted as well all with a view to making him see reasons why FBN should keep the whole money raised. Calls were made to Sanusi Lamido Sanusi (fondly called SLS), then Chief Credit Risk Officer at FBN at the time about the need to keep the funds to avoid the impending waves. It was clear, he was told that FBN will come to the market for more money by 2010 and his response was that such an analysis was unfounded.
Today, we all know the story as it is - FBN is in the market again seeking to raise N500 billion thru a planned bond offering. What a shame!
This is evidently a credibility and integrity problem FBN has dug for itself! It has dealt a severe blow on its corporate identity and credibility. You can compromise anything in a company but not integrity and credibility. How would FBN explain to its customers, potential investors that it now needs the money it rejected in 2006? What manner of credibility loss is that?
What happened here? It's very disturbing and frustrating to see a Bank that rejected more than N500 billion three years ago now coming to the market, seeking same. Investors will immediately interpret this action as meaning a potential going-concern problem. That is a big credibility problem right in there and like you know credibility is the greatest threat to a bank’s bottom line.
That being said, one of the major management problems FBN will stand to face in the coming years is the rate of stock price dilution. It is evident that they have diluted the stock far more than its initial valuation. It makes absolutely no sense diluting the stock further; instead FBN management should focus on buying back as much outstanding shares on the company's book and create more value for shareholders.
Possible Response by Board - Hypothetical
The first recommendation would be to commit at least 5 to 10% of the Bank's profits towards share "Buy Back" thru the next five years and by 2013, FBN Plc should trade at not less than between N300 and N500 / share - IF and ONLY IF those profits they declare are real and not mere paper profits.
This should create a far more reaching value for shareholders than diluting the price.
Seriously, why would you dilute a stock when the price is already very cheap? I mean more than cheap! Nestle and Guinness are good candidates for stock dilution and not FBN.
Ignorance as an escape from Reality
Based on the information available to analysts, the evidence suggests that FBN’s planned BOND offering has every indication of a failure, as is. Not a few investors and analysts have voiced concerns with increasing gaps in level of understanding of what all this is about.
Those who should know, do not. They conceal their ignorance with buzzwords and logic that has no relationship with the workings of a fixed income market. From operators to regulators, we embrace self denial in our approach to investing in bonds – the word on the street now is that anything but the equities market and as such the bandwagon effect is on again.
Having responded to the questions and concerns on that single comment alone with 75% of the respondents agreeing with me that it's actually going to be a failure after giving them the inside details, while the remaining twenty five per cent replied that it will record much success than the previous stock offering. The truth - every one of them is right but the one that truly is ‘in the money’ is one that achieves the best return on investment when the outcome is released.
Categorically speaking, one needs to understand the technicalities of bond(s) before getting involved. It is no longer a major expose to affirm that Nigerians are fond of jumping at any opportunity to make money for which there may or may not possess a background or fore knowledge of/in. In the end, we often get burnt and start looking for someone to blame. It's a shoot before you ask kind of planning and execution in Nigeria. Don't get me wrong though, bond is a good investing tool but not in the current Nigerian setup and context.
Understanding Bonds, at a base level
In layman terms, a bond is simply a debt (IOU) which the investor agrees to loan to a company or government in exchange for a predetermined interest rate at a later date. Please mark and note the words "Predetermined Interest Rate".
Like I said Bond is good but not in this Nigerian setup where currency and interest rates are volatile. No body knows yet the interest rate they are going to sell the bond but let's assume it's going to be 15% to be on the conservative side.
Let's therefore assume today's interest rate as determined by CBN is 10%. Bond holders might think they have made a kill by buying a bond @ 15% interest rate. I am quite sure you know that the biggest economic threat to bonds is rising interest rate. So let's say CBN sees inflation on the horizon in the coming years and decides to raise rates gradually to 17%. Automatically that puts bond holders in the water. How? Simple- because bond prices move inversely to interest rates. When interest rates head north bond prices head south and when interest rates head south bond prices head north.
Hypothetical Illustration
Let me make a simple illustration for you to understand it better. Let's say you buy the FBN bond for N10, 000 @ 5% interest rate with a maturity date of 5 years paid every six months to be conservative. Then CBN raises interest rate to 6%. Now you want to sell the bond. Who do you think will buy it when it is selling 1% below interest rates (5% vs. 6%)?
You have to sweeten the deal so that the buyer gets a market rate for the bond. Remember you can not change the interest rates on the bond. That is fixed at 5%; however you can change the price you will take for the bond. The annual payment of N500 (i.e. N10, 000 X 5%) must equal a 6% payment.
Doing the math you will discover that the face value of the bond must be discounted to N8,333 so that the N500 fixed payment equals 6% yield on the buyer investment - (N8,333 X 6% = N500).
If on the other hand CBN decides to lower interest rates, you could then sell your bond at premium over the face value because the fixed interest rates would be higher than the market rates.
Some examples of why the bond option is not fully there
That being said, if history is anything but a good prediction of future occurrence, would you buy bonds in Nigeria? No, when you know fully well that Nigeria has the most unstable interest rates and currency in the world. That is putting it mildly when considered in tandem with the possibility of interference by the Government for either political or economic considerations.
That is one reason I said it will be a failure but let's go to the second. This one is what most investors, retail investors like you and I don't know and no one will tell you unless you talk to those folks at the big investment houses like Goldman Sachs, Morgan Stanley, Merrill Lynch (now Bank of America) but you know their advise is not free. It comes at a huge price.
Key questions to ask!
Why is FBN, UBA, etc raising more funds through issuing of more shares and bonds? What did these banks do with the funds they raised from the capital market a couple of years ago?
These banks, including FBN are already very bloated – yet it (FBN) gave bonuses to shareholders this year which naturally increased the number of shares outstanding, and they are still going to the market to issue more shares and dilute the shares of the existing shareholders further - these banks are truly irresponsible, and it is not limited to credit and risk management alone; we should include the management of the enterprise.
Is the CBN and SEC aware of what their approval of the current scheme will do to existing shareholders? This is the fleecing of Nigerian investors.
The Bond holder vs. Stockholder
Let me take my time to explain what stock and bond is to you and I am sure you already knew but often leave out. Stock and bond are both securities but the major difference between the two is that stockholders have an equity stake in the company (i.e. they are the owners) whereas bond holders have a creditor stake in the company (i.e. they are lenders). Another difference is that bond usually has a defined terms or maturity after which the bond is redeemed, whereas stock may be outstanding indefinitely.
Now that you know who the two holders of a company are - one who owns the company outright - (stockholder) and the other who lend money to company - (bondholder). When a company determine it can no longer be a going-concern (meaning going down), who do you think the liquidator will settle first? It's obvious the lender will.
So that tells us that the stock you and I have in FBN is a collateral to the bondholders (this is the piece most investors are not informed about).
Recall also that bondholder interest payments take precedence over shareholders dividends since shareholders are owners.
According to Dr. Chuck Biosah, “It is amazing that Nigerians and brokers continue to bid up the shares of FBN whose true fair value is about N15 - pre- the last bonus shares. How can FBN make interest payments on these bonds and still pay any significant dividends. Future annual dividends at N1 will be about 24 billion and the interest on annual interest on the bonds will be approx N50 billion at 10%.”
He adds, “This means that FBN will have to generate at least N74 billion in net income annually for these obligations. Is it realistic? These brokers and investors that continue to buy FBN shares will soon see that the emperor has no clothes.”
Why the FBN Bond Plan is a curious one, as is
OK, we are now at a point you need to sit down and ask yourself a question. If the stock you own in FBN is a collateral to the bondholders why would FBN raise N500 billion in bond when its equity value is only N402 billion? At Friday (021009) closing price, FBN was worth N402 billion.
The question I need to ask you now is who will secure the other N98 billion for the bondholders? Go and ask Stephen Onasanya, CEO of FBN this question and come and tell me his reaction. I bet you that he will scratch his head for an answer and may not be able to sit down if actually if knows the technicalities and the relationship between stock and bond.
That being said, for FBN bond offering to be successful, the stock price need to be at nothing less than N28 because by law, bondholders would need an 80/20 loan to value security coverage. This point makes one wonder if the SEC even knows its function in Nigeria or if Nigeria has a Government that ought to ensure that things are done properly is able to educate those that do not know. If SEC really knows its job; it would not give an approval to FBN to float that bond unless the stock hits N28.
We will rest the discourse here. Let us attempt a review of likely issues through a few Q & A below:
Q: If GT Bank Plc is that very good, how come it doesn't split its shares annually as FBN does?
A: While it is an acknowledged fact that the FBN management is killing the stock by splitting it, we should be clear that not every stock is a candidate for a split. A company will split its stock when the stock is too expensive for an average retail investor to buy in the open market.
It is an established fact that the more you split your stock the more you create outstanding shares in your balance sheet and the more outstanding shares in your balance sheet the cheaper the stock becomes. The FBN management had diluted the stock beyond valuation level. Consider the P/E (Profit / Earnings) ratio which takes into consideration the number of shares outstanding.
The more you split a stock the more you dilute future earnings. So let no investor think FBN is creating more value for you by splitting that stock, they are actually killing you financially. FBN is better off buying back the stocks to create value for shareholders than splitting it.
Q: Would your opinion be different if this Bonds are tradable like is done in the matured markets where investors are free to alternate trades between the Bond Market and Equity Market. Also would your opinion have been different if our interest were to be single digit like we have in other climes.
A: If you read my commentary closely you will notice that my concerns are not whether the bonds are trade-able or not but the overall economic system where such bonds are deemed to be traded.
Owing to the Nigeria economic environment where there is no stable interest rate, currency volatility, I personally don't think our market is matured enough to float corporate bonds at this time be it FBN or otherwise. It is doable however if we have the will but we must put certain things in place which is not there now.
So to answer your question, yes my opinion would have been different if our markets were matured enough. I am very much concerned about our Government inconsistent policies, period. You know how much the Dollar was October 2008 versus the Naira and you equally know how much it is today. Same goes Interest rates. Is that an environment you would want to put your hard earned money into bonds?
Q: Please can you help check if FBN proposed Bond is not Foreign guaranteed.
A: No analyst is yet to sight the Bond Prospectus regarding this proposed bond offering but I can assure you that no foreign entity will dare raise its head and guarantee a penny out of this bond. You know why?
How can you guarantee a fund that is not collateralized (I mean not secured in layman terms). FBN is worth N402 billion for goodness sake and they are planning to raise a debt of N500 billion which is collateralized by it equity value of N402 billion. So tell me if it makes any business sense for any entity to guarantee such debt when you know fully well you will be under water from day one? For the sake of those who may not be well grounded in the world of investing, let us break it down further?
If you walk into any FBN branch tomorrow asking for a loan of N1 million, what would the manager ask you first? Straight and simple question - do you have collateral to backup your N1 million loan request? If you don't have, what would you hear next? Sorry sir we cannot process your loan application. The Bank would not only want N1 million worth of collateral but more. Why? Because they have to index it for inflation and probable risk of default.
So why would you give a N500 billion loan to someone who is worth N402 billion? Who will secure the N98 billion shortfall for you? Or you want to tell me you don't know that a bond does default? Risk wise, I cannot lend N500 billion to someone worth even N600 billion. That is too close to comfort for me and does not make any financial sense at all.
I am quite convinced that Stephen Onasanya and his team know all these technicalities but they want to prey on the ill-informed investing public just because they need to save the bank through its liquidity/funding requirement for purposes of meeting capital needs and the purchase (or possible M&A) opportunities that the CBN has induced which if it fails to take; may make it fall behind competition.
Thus, the informed stand at this time remains that before this bond can sell, FBN equity needs to trade at least N28; else they will be under water.
If you or you know of any shareholder who will be at the AGM on Thursday where this bond offering will be approved, could you please ask them to help us ask Mr. Onasanya and his team to clarify these claims. You will see that they will chuckle and scratch their heads.
http://www.proshareng.com/blog/
![Nairaland [Nigerian Forum] Home](http://www.nairaland.com/Themes/default/images/english/home.gif)
Author
BBS BANNER SUB ONLINE JPG.jpg (48.02 KB, 303x253 )
,abi you forget say person go first hold matchet before e begin look for tree to cut.Personally I need funds to inject into the system,so how your side,u dey give margin 
