Nigerian corporate organisations raised N4.29tn via commercial papers from 2018 through 2020, an analysis of data from the FMDQ Exchange has shown.
According to S.P.A Ajibade & Co, a legal firm, a commercial paper is a type of unsecured, short-term debt instruments issued by corporations looking to raise funds from the public to meet working capital requirements as an alternative to bank credit.
They are usually traded over-the-counter and are by nature unregulated by the Securities and Exchange and are only issued by companies rated highly by a notable credit rating agency.
CPs are usually issued at a discount from face value and reflects prevailing market interest rates. The buyer buys at the discount and the issuer pays back at the agreed interest rate once the tenor of the instrument matures.
The FMDQ stated in its 2018 annual report that 121 new commercial papers valued at over N854bn were quoted on its platform during the year.
In 2019, the number rose to N1.32tn as 181 commercial papers were quoted on the exchange. The year 2020 saw a further increase to over N2.12tn with 248 CPs quoted.
As of December 2018, there were 25 registered commercial paper programmes listed on the FMDQ and valued at over N1tn
By 2020, the total number of commercial paper programmes had grown to 41 with a value of over N3.02tn.
Uche Mathew and Oluwademilade Odutola of S.P.A Ajibade & Co. in “Understanding the Use of Commercial Papers in Corporate Financing” said CPs provided a convenient financing method because they allowed issuers to avoid the hurdles and expenses of applying for and securing other lines of credit from financial institutions.
According to them, the funds are provided by investors willing to purchase the obligations on a discounted basis.
“Investors can diversify investment portfolios and earn good returns,” they said.
On the details of CP subscription, they stated, “The minimum subscription in the primary market depends on the size of the issue and the limit set by the issuer.
“The CBN rules set the minimum issue value at N100m, to be issued in multiples of N50m thereafter. The major drawback for secondary market trading of CPs is the scale of capital involved, given that the dealers usually buy large volume sizes. Therefore, individual and retail investors may not afford to buy CPs traded in the secondary market.”
A senior vice president at FBN Quest, Uwa Osadiaye, told our correspondent that bank loans were generally more expensive than CPs.
He said, “When corporates have little flexibility and need cash injection to meet working capital requirements, they opt for CPs instead.”
The managing director of Credent Investment Managers, Ibrahim Shelleng, said CPs were typically for large ticket transactions.
Shelleng said, “No issuing house would take on a brief that is below N1bn. Their advantage is that if a company has strong financial ratings, it is cheaper to issue a CP than go borrow money from a bank that will require collateral.”
Mathew and Odutola also stated, “The CBN guidelines stipulate that issuers must meet certain conditions to qualify for issuance. To qualify, the issuer must have three years audited financial statements with the most recent not exceeding 18 months from the last financial year end, as well as an approved credit line with a Nigerian bank acting as an issuing and payment agent, where the CP is bank guarantee.
“To safeguard investors’ interests, issuers/promoters are mandated to disclose their identity, details of funding plan for the issue and all material financial facts which may impact the issue.
“The placement/information memorandum must fully disclose the Issuer’s credit risk. A Deed of Covenant is executed by the issuer, to guarantee the rights of the investors against the issuer/promoter.”
They also added that to promote effective monitoring of the investment, the FMDQ published updates on all quoted CPs from live to maturity. Once the issuer’s credit risk crystallises, the CPA/guarantor is to settle the beneficiaries.
In order to ensure that funds mobilised are not tied down, the proceeds from CP issuances can only be used on current assets, or inventories, and are not allowed to be used on fixed assets, without SEC’s involvement.