Nigerian companies are steering clear of the capital markets as a financing source, particularly in the second half of 2024 amid rising key interest rates, according to data tracked by BusinessDay.
New commercial paper issuances since the start of July 2024 fell to N165.8 billion. If no new commercial papers are issued until the end of the year, this would represent an 83 percent decline from the N972 billion commercial papers issued in the second half of 2023.
Read also: MTN Nigeria plans N50bn series 13, 14 Commercial Paper issuance
The decline is steeper than the year-on-year decline in commercial paper (CP) issuances recorded in H1 2024. PwC reports a 37% year-on-year decline in commercial paper issuances for the first half of 2024, with N503 billion issued compared to N797 billion in the same period of 2023.
In the second half of 2024, 30 CP issuances have occurred, a stark contrast from the 127 deals which occurred in the second half of 2024.
This trend underscores the growing pressure on businesses to navigate the high-cost borrowing environment, prompting concerns about the broader implications for corporate funding and economic growth.
So far in H2, Dangote Cement is the largest issuer of commercial papers, raising N54.1 billion through two issuances at rates of 23.28% and 23.04%. However, this pales in comparison to the N219.6 billion the company raised in H2 2023, when it issued five commercial papers, with interest rates ranging between 9.52 percent and 14.74 percent.
The second largest CP issuer in H2 is TGI Foods, the owners of WACOT Rice Mill. They issued two CPs that raised about N28.99 billion, at rates of 23.54 percent and 23.43 percent. Dufil Prima Foods, makers of Indomie follow closely with N28.62 billion from a single issue at a rate of 23.83 percent.
Johnvents Industries which owns a cocoa processing plant in Akure issued two CPs at rates of 23.88 and 23.02. They raised N18.81 billion.
The drive to issue debt instruments at these levels is influenced by the high returns on government-issued short-term securities. For instance, the Central Bank of Nigeria (CBN) has offered OMO bills with rates reaching 24.32%, while Treasury bills have been issued at rates as high as 23.5%.
Essentially, the rising returns on government fixed-income instruments have shifted investor preferences, hence, the companies have to go higher to capture investors attention.
The Central Bank of Nigeria has raised interest rates five times this year, increasing the Monetary Policy Rate (MPR) by 850 basis points to 27.25%, triggering a corresponding rise in bank lending rates and returns on fixed-income investments.
With the inflation rate at 33.88 percent as of October 2024, there seems to be no end in sight to the CBN’s hawkish stance on the monetary environment.
A review of bank lending rates in Nigeria reveals that some banks charge rates as high as 48%, with Zenith Bank’s lending rates ranging between 27.78% and 38.50%. Keystone Bank’s lending rate ranges from 30.5 percent and 36 percent, while First Bank’s lending rate ranges between 26 and 36 percent.
Read also: MTN Nigeria plans N50bn series 13, 14 Commercial Paper issuance
Although capital market financing is currently less expensive than bank borrowing. However, the rates issued in the capital market are as never seen before.
With expensive bank borrowing, companies have been discouraged from taking loans to fund their operations, expansions and capital projects. The tightening of credit is problematic for sectors that are reliant on debt financing, such as real estate, manufacturing, and retail, where affordable credit is critical for growth.
BusinessDay reported that manufacturing firms have been scaling back their expansion plans based on the drop in their capital expenditure margin.
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