Nigerian businesses have continued to raise funds to finance their businesses through issuance of Commercial Papers (CPs) championed by FMDQ Securities Exchange Limited.
Commercial Papers (CPs) are short-term debt obligations of corporations. They can be issued for tenors of up to 270 days in the Nigerian financial markets. Like Treasury Bills, they are typically issued at a discount and redeemed at par (face value amount) upon maturity. They are also typically issued by large corporations with good credit ratings and history. CPs are quoted and traded/reported on relevant platforms of FMDQ Exchange.
The programme has played a critical economic role in bringing about reform in various ways as local companies have accessed the FMDQ market to raise fresh capital instead of borrowing from banks that come with high-interest rates.
The FMDQ Exchange in 2022 had listed numerous issuances and the outcome has further enhanced corporate earnings and as a result, drive stock prices and boost investors’ confidence.
As at June 30, 2022, 17 companies cutting across several sectors of the economy, have registered a total of N857 billion Commercial papers from January to June 2022 on the floor of the FMDQ Securities Exchange.
FMDQ has approved the registration of MTN Nigeria Communication N150 billion CP. FCMB Group, FBNQuest Merchant Bank, Providus Bank and Coronation Merchant Bank listed N100 billion CP each on FMDQ, while Rand Merchant Bank Nigeria listed N80 billion CP.
Other Companies are Nova Merchant Bank, Lekki Gardens Estate Limited, Robust Intentional Commodities Limited, UAC of Nigeria (UACN), SKLD Integrated Services, Veritasi Homes and Properties, Skymark Partners, Total Nigeria, Babban Gona Farmer Services Nigeria and Mixta Real Estate.
The chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion stated that the issuance of Commercial Papers (CPs) has become the new trend in the Nigerian capital market used by companies to finance their operations.
He noted that “when businesses require a cash injection to meet working capital requirements, they turn to commercial papers rather than borrowing from Nigerian commercial banks on a short-term basis. CPs are typically issued at a discount to face value, reflecting the prevailing market interest rates in the country. As a result, it is cheaper for companies to raise capital through the commercial paper markets than borrowing from commercial banks because bank lending comes with higher interest rates.”
The vice president, Highcap Securities Limited, David Adonri, said, “commercial Papers (CPs) are short term money market instruments used to finance working capital while equities are long term instruments used to finance fixed or long-term assets. They serve different purposes.
“The increasing issuance of CPs may be due to increase in need for short-term working capital finance rather than necessity for projects finance.”
An analyst at PAC Holdings, Mr. Wole Adeyeye, while speaking on the rush for commercial papers by companies, explained that most companies see CPs as one of the cheapest ways to increase their capital since yields on short-term instruments are relatively low compared to other instruments.
Speaking on the advantages of CPs, Adeyeye maintained that an active CP paper market provides companies with the opportunity to raise capital to meet their short-term funding obligations, saying “CPs typically do not create a lien on the company’s assets, and this creates room for enhanced operational flexibility.
“In addition, interest on the debt is normally tax exempt and can be deducted from the company’s tax return, lowering the actual cost of the loan to the company. Thus, commercial papers impact the ability of companies to remain competitive and sustainable.
“As an investment tool, CPs help to diversify an investor’s portfolio, thereby reducing the overall portfolio risk. The short-term nature of CPs also permits a quick return on investment and allows investors remain relatively liquid.
“All of these enhance a vibrant and robust financial system thereby effectively and invariably contributing to the country’s economic growth and development.”
Also speaking on the spike in the issuance of commercial papers, FMDQ noted that the instrument typically does not create a lien on the company’s assets, and that this creates room for enhanced operational flexibility.
“In addition, interest on the debt is normally tax exempt and can be deducted from the company’s tax return, lowering the actual cost of the loan to the company. Thus, commercial papers impact the ability of companies to remain competitive and sustainable.
“As an investment tool, commercial papers help to diversify an investor’s portfolio thereby reducing the overall portfolio risk. The short-term nature of CP also permits a quick return on investment and allow investors remain relatively liquid.
“All of these enhance a vibrant and robust financial system thereby effectively and invariably contributing to the country’s economic growth and development,” the exchange disclosed.
The exchange also boasted that the timely admission of the issued CPs and in general, all securities on the exchange was a testament of the efficiency of its securities quotation process.
