Why Nigerian big companies scramble for commercial paper

In search of cheap funding, eight Nigerian big companies tapped the country’s low-interest-rate environment to raise a combined N93.02 billion worth of commercial papers (CP) in the third quarter of 2021.

Compared to three years ago when the interest rate was up to 18 percent, Nigeria’s 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 eight companies that issued the commercial paper in the review period did so at an average of 10.54 percent, 6.47 percentage points less than the 17.01 percent inflation rate reported in August.

Meanwhile, the Central Bank of Nigeria’s Monetary Policy Rate (MPR0), the benchmark against which other lending rates in the economy are pegged is currently at 11.5 percent, as retained by the monetary policy committee in September 2021.

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 probably would have obtained the cash at an interest rate of between 18 to 20 percent or more.

The eight companies as compiled from data by FMDQ include Mixta Real Estate Plc, Coronation Merchant Bank, FSDH Merchant Bank, United Capital Plc, Trust Banc Holdings, Coleman Technical Industries, Eunisell Limited and Prima Corporation Ltd.

The proceeds from the issuance will be used to support the issuers’ general corporate purposes, short-term funding requirements and working capital needs, the companies said in a notice.

“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 Mgt, states.

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.

Although increasing, the government Treasury Bills (T-Bills), the benchmark for determining the interest rate corporates pay investors for borrowing their money has remained relatively low this year.

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 7.5 percent on September 29. Analysts expect the rate to decline further on account of investors’ decision to redirect assets to high-yielding instruments. Stop rates had plunged to a four-year low of near-zero percent in the third quarter of 2020.

Read also: Coronation, United Capital, others issue N93bn commercial paper in Q3

Breakdown of the FMDQ data revealed that Coronation Merchant Bank accounted for 26.88 percent of the total CP that was raised in the third quarter of this year. The company issued a combined N25 billion worth of commercial paper in the review period.

This was followed by Mixta Real Estate’s N11.78, United Capital’s N19.72 billion and FSDH Merchant Bank’s N19.6 billion. Trust Banc Holdings, Coleman Technical Industries, Prima Corporation Ltd and Eunisell Limited completed the list with N5.89 billion, N3.95billion, N3.57 billion and N3.5billion, respectively.

While the low-interest-rate environment in Nigeria’s debt market has been a boon for large corporates and the Nigerian government 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, 29percent of businesses see the high-interest rates on loans as the most important limiting factor to getting funding for working capital and expansionary activities. Out of which, 25 percent cite insufficient collateral or guarantees for funding, while 22 percent point to the current economic conditions as the most important limiting factor.

According to the NBS, less than 5 percent of SMEs have been able to access adequate finance for working capital and funding business growth/expansion.