Commercial Papers seen favoured in boardroom capital raising plans

Board members of many companies are pondering the long-term risks of diluting their equity holdings in publicly listed companies for paltry stock prices due to declining demand in equities market.

The bearish sentiment which dominated global equities, found its way into the Nigerian market as investors sold off top stocks in the Banking, Consumer and Industrial sectors.

While many issuers set out to achieve the best value for their first public share sell or even public offering, prospective investors take a new look at these companies relating to their stock pricing and corporate earnings.

Boardroom sources close to strategic meetings for companies capital raising, see as a viable option the issuance of Commercial Papers (CPs) –a short-term debt financing instrument which consists of unsecured and discounted promissory notes.

CPs are issued by large corporations and they can be readily traded.

Issuers who prospect Initial Public Offerings (IPO) in the Nigerian stock market are shying away from testing the waters of a downbeat market, as evidenced in negative returns of about 16.3percent.

BusinessDay learnt that new questions like – “Can we make the capital raising through a tough stretch”? –become the advice of boardroom members who have seen how Nigerian equities are taking a beat due to volatile forex and macroeconomic concerns.

Concerns about Nigerian macro-economy, foreign investors call for naira devaluation against the greenback, and jitters in credit markets, are prompting investor skepticism about issuers, particularly those that are not very profitable or are carrying heavy short-to-medium term debt loads.

“Primary market activity in 2016 is expected to continue the dry ‘spell’ due to obvious reasons, chief of which is downbeat in global economic activities”, said the Saheed Bashir-led team of research analysts at Meristem Securities.

“An active secondary market is required for primary market and this is currently elusive. As per cost, we believe the Nigerian capital market is not yet transactional efficient. A further reduction in statutory fees will definitely boost volume from locals and offshore participants”, he added.

The Bismarck Rewane led-team of analysts at Financial Derivatives Company, in their monthly economic news and views at the Lagos Business School executive breakfast meeting, observed that about N1.63trillion was wiped-off equity investors’ wealth in January, representing 14.18percent of market capitalisation.

The analysts linked the dismal performance of the equities market to divergent monetary policies, oil price fall, and currency conundrum: “a significant negative effect,” which they said led to capital reversal, continued market volatility, and concerns over risk – macroeconomic risk. 

While crude oil prices are expected to trade lower in 2016, it portends a downside to Nigerian equities, according to the Kayode Tinuoye-led team of research analysts at United Capital plc said.

United Capital plc is bearish on equities as it expects the market to ride the roller coaster of oil price and foreign portfolio investment (FPI) funds flows in 2016.

“The strongest co-movement has occurred in the last two years and we expect this trend to continue over 2016.  In deriving target returns for the market, we have assumed three oil price scenarios ( bull, bear, and base case) on a quarterly basis with weighting driven by our expectations around possible events in each quarter and their likely impact on oil prices”, United Capital analysts said.

“I think the low interest rate environment will present opportunities for borrowers to renegotiate terms of their loans and possibly- (those with the right structures in place)- approach the capital market, mainly on the debt side.

So there will be a bit of activities, whether in the short term earns CPs or in the longer term earns like bonds. I think for good issuers, this year, there is a possibility of extending the debt curve. So, typically you will have corporate issue debts between the five to seven years curve and may even extend that to a ten year curve this year”, said a regular boardroom player.

Analysts say major benefit of CPs to the issuers is a high potential for better interest rates than bank loans. Commercial Papers are usually issued by companies with very high credit ratings.

Commercial Papers tend to be a very low-risk investment and also offer competitive returns to investors in compensation for the issuer’s credit risk.

From record highs in 2008, there has been a lull in Nigeria’s IPO market since 2015 as most companies resort to delay strategy.

As part of its key strategic mandates to develop the market, FMDQ provides a robust platform for the quotations of Commercial Papers (CPs).

Quotation of CPs on FMDQ gives issuers access to a wide range of knowledgeable and capitalised investors (qualified institutional investors & eligible individual investors) through FMDQ Members. Liquidity is enhanced through the trading of the instruments by FMDQ Dealing Members and other stakeholders such as Pension Fund Administrators (PFAs), Fund Managers etc on FMDQ OTC securities exchange.

CPs are issued for tenors ranging between a minimum of 15 days and a maximum of 270 days, inclusive of a rollover from the date of issue. Every rollover is treated as a new or separate issue.

Issuers history at the OTC debt capital market shows that Stanbic IBTC Plc was the first company to quote its N100billion commercial paper (CP) on the trading platform of FMDQ OTC Securities Exchange. Others are Wema Bank (N20billion) and Nigerian Breweries (N100billion). Industry source disclosed that Guinness Nigeria plc will soon join the league of these CPs issuers at the OTC market.

While CPs allow investors to diversify their portfolios and also improve the returns on their investment, the improved liquidity serves to ensure ease of entry and exit from the CP market by these investors.

Desirous of entrenching transparency and governance in the Nigerian financial market, FMDQ identified the need for a robust structure around the issuance and quotation of CPs. Consequently, FMDQ developed a process to revitalise the Nigerian money market and further enhance transparency at the short end of the corporate yield curve.

Arik Air, one of the largest Nigerian-owned airlines had planned to list the carrier on the floor of the Nigerian Stock Exchange (NSE) by May 2016 as part of its management’s efforts to boost the airline’s capital base and acquire even more fleet.

Also, MTN Nigeria, which is now contesting an outrageous regulatory fine had planned to become a Public Liability Company (Plc) in 2016 by listing its shares on the floor of the Nigerian Stock Exchange by way of public offer for purchase by interested members of the investing public.

Sahara Group, a Nigerian energy company, had plans to raise as much as $1.4 billion (N277billion) through a dual listing of its oil and gas unit in London and Nigerian Stock Exchanges, along with a debut dollar bond sale.

There were also indications that Interswitch Limited, a payment processor and debit card provider was considering a dual IPO on both the London and Nigerian Stock Exchange this year as it plans an expansion into new African markets.

Iheanyi Nwachukwu