In a bold move that could reshape Nigeria’s fixed-income landscape, DLM Capital Group is pioneering a groundbreaking financial instrument. The N30 billion Sovereign Bond-Backed Composite Notes (SBCN) are a first-of-their-kind hybrid note in the local market.
At the helm of this innovation is Sonnie Babatunde Ayere, Group CEO of DLM Capital Group, whose 20-year journey in Nigeria’s capital markets has seen him lead several firsts. In this exclusive interview with BusinessDay’s DAVID OLUJINMI, Ayere explains how the sovereign composite note was conceived, how it works, and why it could unlock long-overdue capital for Nigeria’s underserved sectors.
Can you help us understand the broader context behind the DLM hybrid notes? We understand this is the first product of its kind in the world. So, guide us through it.
The sovereign composites, as designed by DLM, represent the first time you’re seeing a true hybrid: a thoughtful blend of sovereign cash flows and the risks typically associated with sovereign debt, combined with cash flows from other sectors of the economy.
It doesn’t necessarily have to be from consumer loans or SME loans; it could be from any real sector. But essentially, you’re seeing a product where both sovereign and real sector cash flows are used together to meet investor obligations.
What makes this product unique?
A few things. First, it’s the seamless integration of sovereign and real sector cash flows into a single investment product. Second, it delivers an upward return profile.
So, this sovereign composite is able to combine two traditionally opposing attributes: investor security and strong yields. Now, typically, high returns come with high risk, while low-risk products offer low returns. But what we’ve managed to do here is to design a product that provides low risk and high return.
Take the inaugural bond we’re launching; it offers triple-A-rated certainty on both principal and interest and a hold-to-maturity return of nearly 50%.
Don’t you worry about mixing FGN securities with potentially non-performing consumer loans?
Of course, we do consider the risks. But the way we’ve structured it, the investor’s principal and interest are fully protected, even in the absence of real sector cash flows. The additional cash flows simply enhance the yield. They’re not a dependency.
So, if those cash flows from the real sector don’t come in, the investor still receives all due interest and principal. Unlike traditional bonds, where the principal is paid at maturity, this one amortises, so you receive principal and interest together over time.
Is there a set ratio for how much of the underlying asset base is FGN bonds versus consumer loans?
There’s no fixed ratio, but the sovereign component will always be higher. Think of it like a barbell, slightly lopsided toward the lower-risk end. So, yes, roughly less than 50 percent exposure to the riskier real sector assets.
Will these notes be listed on any exchange?
Absolutely. We’re listening to FMDQ. We may also explore listing on NGX, depending on regulatory requirements.
You mentioned earlier that regulatory approval had been secured?
Yes. We’ve received approval from the Securities and Exchange Commission. Any product being marketed to institutional investors must have SEC approval, including the information memorandum. That entire process took about six to seven months.
How long has this product been in development?
About two years. I’ve been thinking about this for a while. I came back to Nigeria from the IFC in 2005, so that’s 20 years in the Nigerian market now. Even before I left the IFC, I was involved in developing Nigeria’s bond market. It was a personal initiative, and I thank God that today it’s worth trillions.
I remember dreaming of the day we’d see job ads for bond traders. When that day came, it was like seeing a dream come true, a functioning ecosystem that supports job creation and national financing.
And this new product continues in that legacy?
Exactly. I’ve always known Nigerian investors dislike risk but love returns. So, I sat down one night and started thinking: How do I build a product that offers both?
One idea led to another, borrowing from how we structure loan portfolios. How we designed the DLM Scale, which was structured around buying shares and contractually returning capital while retaining equity ownership.
That thought process eventually led to the sovereign composite. It took a lot of refining. I remember presenting it to the rating agencies, explaining it, going into depth, and working with lawyers to structure all the required legal agreements.
It took tenacity. There were moments I doubted whether it would work. But I always say: believe in yourself, carry others along, and don’t give up.
So, you had to explain this new concept to both rating agencies and the SEC?
Yes. And I’m grateful they listened. The product was rated out of South Africa, and it was reviewed thoroughly. Every detail was sifted through.
Given Nigeria’s volatility, what protections are in place for the senior tranche, primarily the FGN bonds?
Great question. The beauty of this product is that it doesn’t take on market risk in the traditional sense. We’re focused on fixed coupons.
Take, for instance, a period when inflation hits 30 percent. Bonds may trade at a discount, but coupons remain unaffected. The investor receives their contracted return. And because the product has an upward-sloping return profile, it adjusts upward as inflation rises.
So, unless inflation reaches extraordinary levels, say, 50 percent, you’re still in the clear.
Depending on this product’s success, are you planning more issuances?
By God’s grace, yes. We’re hoping to see more of these in the market, maybe N100 billion or more in future issuances.
This product also helps de-risk the portfolios of corporate bond fund managers. If you hold a portfolio with 50 percent vanilla bonds and infuse 50 percent of these sovereign composites with triple-A risk, you’ve significantly improved your overall risk profile while increasing returns.
Are there specific sectors you’re looking at within the real sector?
The product is designed to span the real sector broadly. We mention consumer and small business loans because that’s our expertise as a financial institution. But as we collaborate with other companies in the future, the goal is broader real sector coverage.
You started this in a competitive market. How do you see that playing out?
Competition is expected. Once a novel product like this is introduced, whether in securitisation, principal finance, etc., others will follow, deconstruct it, and try to replicate it.
But I’m proud that DLM pioneered this. That’s a legacy we’re proud of.
You’re growing rapidly as a group—subsidiaries, new products. What should we expect in the short, mid, and long term?
Personally, I’d like to see DLM follow the path of firms like IBTC, creating an enduring institution that grows and outlives its founders. Eventually, you step back like a parent watching their child grow into adulthood.
Any plans to become a deposit money bank?
It’s too early to say. Let’s see how things evolve. But the goal is to create an institution that can stand the test of time.
