Three months after the Central Bank of Nigeria (CBN) decided to confer liquid asset status on eligible state government bonds; it has finally issued guidelines to operationalise the decision. With the guidelines, the Securities and Exchange Commission (SEC) is expected to monitor the execution of projects carried out with proceeds from state government bonds.  

The apex bank decided to confer a status of liquid assets on states government so as to allow the bonds issued relative ease in transfer of ownership by way of being traded in an open market. 

For an asset to be liquid, it needs an established market with enough participants to absorb the selling without materially impacting the price of the asset. There also needs to be a relative ease in the transfer of ownership and the movement of the asset.  

Liquid assets include most stocks, money market instruments, and government bonds. The foreign exchange market is deemed to be the most liquid market in the world because trillions of dollars exchange hands each day, making it impossible for any one individual to influence the exchange rate.  

The central bank, in its guideline also said, for outstanding bonds, an SEC confirmation shall be required. With the guidelines, CBN said the issuance of bonds shall be backed by a law enacted by the State Assembly, specifying that a Sinking Fund fully funded from the consolidated revenue fund account of the issuer be established, and the state government shall have in place a fiscal responsibility law, with adequate provisions for public debt management, in order to enhance investors’ confidence in the issuer. 

The state governments are also expected to have a credit rating at inception and throughout the tenor of the bonds. The credit rating shall be determined by a rating agency registered or recognized by the Securities and Exchange Commission (SEC).

The issuer shall provide an Irrevocable Standing Payment Order (ISPO) which shall be payable out of the statutory allocation of the state government and shall be deductible at source. The ISPO, it said shall be approved by the State Assembly.  

The ISPO is a written mandate given by the issuer (State government) of a bond to the Accountant General of the Federation (AGF) authorizing the AGF to deduct, at source, predetermined sums of money from the statutory allocation of the issuer. The CBN also said, issuer shall maintain a fully-funded sinking fund, a fund into which an issuer sets aside money over time, in order to retire its debt instruments. The guideline said it is to be managed by a Trustee registered by the SEC.

The state government in that status is expected to establish a debt management department in order to enhance transparency and the professional management of debt issues.   It said, the state government bonds shall be limited to a minimum maturity of seven years in order to be considered for liquid asset status.

The guideline also expect that the state government bonds shall comply with all the relevant provisions of the Investment and Securities Act (ISA 2007) including amendments thereto as well as SEC’s rules as may be

(Source: Businessday)