Instruments

Instruments

Overview

Raising debt capital on ESX allows both the public sector and corporations access to a wider pool of investors to raise capital efficiently in a regulated market. Debt capital markets provide governments with a sustainable means to finance budgetary needs as well as invest in productivity boosting long term infrastructure projects that tend to benefit the general population in the long run through the issuance of government bonds.

Corporations issue bonds to the public in the fixed income market to raise capital for their operations and long-term capital expenditures as an alternative to issuing equity and without having to pledge collateral. Effective debt markets are especially useful for companies when high-cost, large-scale projects that are traditionally long term – and usually out of scope for bank loans – need financing. Additionally, the presence of an organized fixed income market adds another funding option for firms in addition to listing equity shares and can help improve their capital structure through an optimal mix of debt and equity to minimize the cost of capital while enhancing shareholder value.

Treasury Bills and Bonds

  • Treasury Bills (T-Bills) are safe, short-term debt securities issued by the Ethiopian government (Ministry of Finance) to investors with a maturity period of one year or less.
  • The National Bank of Ethiopia acts as an agent for the Ministry of Finance and issues T-bills through a market based auction process in the primary market.
  • T-Bills are auctioned biweekly with a minimum investment amount of ETB 5,000 and are issued in four different maturities of 28-days, 91-days, 182-days and 364-days with fixed rates of interest.
  • T-Bills are sold at a discount from the face value of the bill at the date of issue, meaning the purchase price is less than the face value of the security on the purchase date. When the T-Bill matures, the investor receives the face value of the T-Bill.
  • The interest received by the investor is reflected in the difference between the discount sale price on the purchase date and the face value received at maturity.
  • Treasury Bonds are safe, long-term debt securities issued by the Ethiopian government to investors with a maturity period of more than one year.
  • Treasury Bonds enable the Ethiopian government to raise capital to fund long-term infrastructure investments and finance fiscal deficits using local currency debt.
  • Investors in Treasury Bonds receive fixed periodic interest payments throughout the life of the bond and then receive the face value of the bond at the date of maturity.
  • Investors can buy and sell listed government securities in the secondary market prior to maturity through the ESX trading platform.
  • Interest earned from investing in government securities is tax-exempt in Ethiopia.

Corporate Bonds

  • A corporate bond is a fixed income security issued by a company in order to raise capital.
  • Corporate bonds provide companies an alternative and more efficient source of long-term capital relative to traditional bank loans, providing a sustainable avenue to fund capital expenditure needs.
  • Similar to most loans, corporate bonds are interest-bearing long-term securities (> 1 year) issued at fixed or variable interest rates. Unlike bank loans, however, companies are not required to pledge collateral when issuing a corporate bond.
  • A corporate bond is generally backed by the ability of the issuing company to repay, which depends on its prospects for future revenues and profitability.
  • Investors in corporate bonds receive periodic interest payments throughout the life of the bond and then receive the face value of the bond at the date of maturity.

REPURCHASE AGREEMENTS/ REPOS

  • A repurchase agreement (repo) is a secured short-term form of borrowing (usually 1-7 day term) that involves selling a security with an agreement to repurchase it at a higher price later in the interbank market.
  • Repo’s are commonly used by banks and dealers in government securities who sell government securities to a lender and agree to repurchase them at an agreed price later to meet short-term liquidity needs.
  • The government security pledged by the borrower in a repo trade serves like collateral thereby reducing counterparty credit risk significantly and enhancing market liquidity.
  • The ESX repo platform acts as a matchmaker by bringing buyers and sellers of funds in the repo market together efficiently in an organized manner.

Commercial Papers

  • Commercial papers (CPs) are short-term debt obligations issued by large corporations with a maturity period of less than 270 days.
  • CPs are usually sold to investors at a discount to face value and primarily issued by corporates to fund working capital or finance short term assets. Investors receive the face value of the CP instrument at maturity.
  • Corporates can efficiently issue which can then be quoted and traded on the secondary market by market participants on the ESX platform.