Nigeria’s low-interest-rate environment has created an opportunity for corporates in the telecommunication, agric, oil & gas, manufacturing, financial services and among other industries to tap the debt capital market for cheap funds through commercial paper (CP) issuance.
Sixteen companies issued over N339.68 billion worth of commercial papers in the 12 months to December 2021, as compiled from the data by FMDQ.
The top five gainers that tapped Nigeria’s low-interest-rate environment for cheap funds last year include Coronation Merchant Bank, MTN Nigeria, Dangote Cement Plc, Union Bank of Nigeria and United Capital Plc.
The funds raised by the corporates accounted for 72.309 percent of the total CP that was raised in the review period. The companies issued a combined N 245.62 billion worth of commercial paper.
“An era of low-interest rate is the best time for companies to restructure their debt and access lower finance cost to grow their bottom line,” Yinka Ademuwagun, Yinka Ademuwagun, investment management analyst at ValuAlliance Asset Mg, states.
Compared to two years ago when the interest rate was at a record high of over 15 percent, the current single-digit interest rate means lower financing costs for corporates that are borrowing to finance their operations.
Analysis of the FMDQ data showed that the 16 companies that issued the commercial paper in the review period did so at an average of 10.03 percent, 6.97 percentage points less than the average inflation rate of 17 percent reported in 2021.
If the companies were to go to banks to borrow the kind of funds they raise through CP, they would have paid at least 15 percent interest. That is even because they are big institutions. If it were smaller companies, they probably would have obtained the funds at an interest rate of between 18 to 20 percent or more.
Meanwhile, the Central Bank of Nigeria’s Monetary Policy Rate (MPR), the benchmark against which other lending rates in the economy are pegged, is currently at 11.5 percent. The apex bank has consistently retained the same rate since September 2020.
Also known as an unsecured short-term debt instrument issued by large corporations to raise funds to meet short term financial obligations, commercial papers are issued within a short period, usually between 15-270 days. While commercial papers are issued by companies, Treasury bills are issued by the government.
Read also: Investors’ appetite for T-Bills dampens as low-interest rate persists
Yields on the government Treasury Bills (T-Bills), the benchmark for determining the interest rate corporates pay investors for borrowing their money, remained relatively low in 2021.
After crashing to a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free Treasury bill jumped to more than 17 months-high of 9.75 percent on May 14.
The rate, however, plunged to an 11-month low of 4.9 percent at the last auction of 2021, as compiled from Nigerian treasury bills primary market auction results for December 29, 2021, an opportunity for both government and corporates as they raised capital at a lower cost.
The CPs are issued at a higher interest rate than T-Bills because of the absence of the full faith of the federal government.
Interest rates, according to research analysts at Agusto & Co. will remain low in 2022 “because we have an accommodating CBN willing to help the FGN borrow from the markets at rates below inflation.”
While the low-interest-rate environment in Nigeria’s debt market has been a boon for large corporates who are raising capital at cheaper rates compared to bank loans, micro and small businesses, which form the bulk of firms in the country, are left out.
Lack of proper documentation and inability to meet listing requirements are some of the reasons Nigerian small businesses are unable to tap the low-interest rate opportunity.
Breakdown of the data by FMDQ showed that FSDH Merchant Bank raised N12 billion under its various CP Issuance Programme in 2021. The lender also floated N19.6 billion and FSDH Funding SPV Plc, a special purpose vehicle set up to raise capital from the Nigerian debt capital market.
Other corporates that also tapped the Nigerian capital market in 2021 include Total Nigeria, (N15 billion); Mixa Real Estate, (N13.36 billion); Valency Agro Nigeria, (N12.36 billion); FBNQuest Merchant Bank Limited, (N7.34 billion); Nigerian Breweries, (N4.66 billion); Prima Corporation Limited, (N3.57 billion); Eunisell Limited, (N3.50 billion); DLM Capital Group Limited, (N2.25 billion); while TrustBanc Holdings Limited, (N0.20 billion).
