Nigeria’s first composite debt-fund seeks to raise N30 billion

DLM Capital Group is seeking to raise N30 billion in Nigeria’s first Sovereign-Bond Backed Composite Notes.

The first of its kind fixed income product combines the security of direct sovereign bond-backed principal protection, such as FGN Bonds, with the enhanced yield potential of corporate and consumer lending cash flows. This hybrid structure, the first of its kind in the local market, merges public-sector credit safety with private-sector income generation.

The instrument is designed such that the private sector credit tranche will be secured by the FGN-bonds, which will be the senior tranche.

The N30 billion Sovereign Bond Backed Composite Notes issued by DLM Funding SPV Plc is being packaged as a AAA-rated note. With a held-to-maturity yield of 49.9 percent, the notes are designed to be attractive to institutional investors seeking a balance between capital preservation and superior returns.

Sonnie Babatunde Ayere, the Group CEO of DLM Capital Group, noted about the SBCN, “For asset managers, it enhances portfolio quality, improves credit profiles, supports diversification, and delivers competitive returns.

In a media parley describing the instrument, Ayere highlighted the role of the instrument in driving credit expansion to the underserved private sector. He highlighted how the note could help drive institutional capital into sectors that were previously considered too risky.

“By channeling domestic capital into these critical but underserved sectors without exposing investors to excessive risk, it becomes possible to mobilize funding for parts of the economy that have long been neglected.” He added.

Corporate bond issuances in Nigeria have declined massively since 2023, given the jump in Nigeria’s benchmark interest rate, from 18.75 percent to 27.5 percent in 2024. However, most companies have shifted focus to short-term commercial papers, which are issued at yields between 27-30 percent.

“Locking into debt for five to seven years at over 30% is financial suicide for most businesses,” Ayere noted. He noted that the note’s structure allows firms to access funding at lower cost, as the sovereign-backed portion of the instrument carries the cost-burden of the debt.

“In many ways, it’s as if the government is helping to subsidize your borrowing, thanks to the sovereign-backed portion of the instrument. In a sense, you’re benefiting from government credit strength to improve your own cost of capital.”  

Structure of the instrument

If DLM Capital raises N30 billion, it allocates a portion to purchasing FGN bonds and channels the remainder into SME lending. The structure generates cash flows from two key sources: coupon payments from the government bonds and loan repayments from SMEs.

Crucially, in the event of defaults on the SME side, the cash flow from the FGN bonds alone is sufficient to cover both principal and interest obligations. This effectively de-risks the instrument for investors, providing them with a high level of security while still offering enhanced returns.

Although the product is fundamentally sector-agnostic, its initial focus is on consumer finance and SMEs, largely due to the sponsor’s existing banking infrastructure. For instance, the group’s digital bank currently extends credit to SMEs and individuals.