Nigeria’s low-interest-rate environment has created an opportunity for corporates in the telecommunication, agric, oil & gas, financial services and among other industries to tap the debt capital market to raise cheap funds through commercial paper (CP) issuance.
Sixteen companies have raised a combined N362.82 billion worth of commercial papers in the eight months to August 2021, as compiled from the data by FMDQ.
Compared to two years ago when the interest rate was at a record high of about 15 percent, the current single-digit interest rate means lower financing costs for corporates that are borrowing to finance their operations.
Yields on the government Treasury Bills (T-Bills), the benchmark for determining the interest rate corporates pay investors for borrowing their money, has dropped to more than three-month low.
After hitting more than 17 months-high at 9.75 percent on May 14, yields on the Federal Government less risky T-Bills dropped to 6.80 percent on August 25. Analysts expect the rate to decline further on account of the expected increase in demand. Stop rates had plunged to a four-year low of near-zero percent in 2020.
Commercial paper represents a short-term debt instrument issued by corporates to meet their financial obligations as well as cover short term receivables within a short period, usually between 15-270 days. Generally, CP carries a lower interest repayment rate than bonds and loans due to the shorter maturities of CP.
“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.
Analysis of the FMDQ data revealed that MTN Nigeria and Coronation Merchant Bank accounted for 40 percent of the total CP that was raised in the first eight months of this year. Both companies issued a combined N 145.23 billion worth of commercial papers in the review period.
While the telecommunication company raised a total of N73.51 billion from two series of commercial paper issuance, the investment bank, on the other hand, issued N71.72 billion from about ten series.
Commodities Funding SPV Plc and Union Bank Plc were also made the top five list of companies that raised some of the largest commercial papers in the review period. The former issued N N50 billion worth of paper while the latter raised N34.96 billion.
Read also: 16 companies ride on low interest rate to raise N362bn commercial paper
Other companies that followed behind the biggest issuers include Dufil Prima, Parthian Partners Limited, United Capital Plc, Mixta Real Estate Plc, FSDH Merchant Bank Limited, Stanbic IBTC Bank PLC, Fidson Healthcare PLC, Valency Agro Nigeria Limited, CardinalStone Partners Limited, TrustBanc Holdings Limited, Coleman Technical Industries Limited and Nigerian Breweries PLC.
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 8 percent, 9.38 percentage points less than the 17.38 percent inflation rate reported in July.
If the companies were to go to banks to borrow the kind of money they raise through CP, they would have likely gotten at least 15 percent. That is even because they are big institutions. If it were smaller companies, they would probably be getting it at between 18 to 20 percent or more.
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.
Checks by BusinessDay, however, show that some of the small businesses indirectly benefit from the big companies who are accessing cheap funds but to directly raise growth capital micro, small and medium enterprise (MSMEs) companies have to bear the cost of borrowing from commercial banks.
Nigeria’s SMEs contribute nearly 50percent of the country’s GDP and account for over 80percent of employment in the country. Despite the significant contribution of SMEs to the Nigerian economy, challenges persist that hinder the growth and development of the sector.
Primary among the myriad of challenges encountered by the sector is the lack of access to affordable capital.
According to a survey conducted by PWC, 29% of businesses see the high interest rates on loans as the most important limiting factor to getting funding for working capital and expansionary activities. 25 percent cite insufficient collateral or guarantees for funding, while 22% point to the current economic conditions as the most important limiting factor. According to the NBS, less than 5% of SMEs have been able to access adequate finance for working capital and funding business growth/expansion.
A check by BusinessDay on guidelines to issue a commercial paper indicate that corporates must provide an ‘Issuer’ or ‘Issue’ rating of minimum investment grade; the commercial paper issued must be a minimum size of about N100 million, and the issuer must have been incorporated for not less than five years and be in operation for not less than 3 years before registration for commercial paper issuance.
Analysts noted that these regulations concerning the issuance of commercial papers cannot be met by the majority of MSMEs in Nigeria because of their weak financial capacity and are left to borrow at outrageous costs from commercial banks.
