While Nigerian companies are taking advantage of the low interest rate environment to raise capital, the short-term commercial paper (CP) is most preferred by corporates to bonds due to the low cost of finance and the short maturity period, as compiled from a survey by BusinessDay.
Out of the total N658.5 billion debt issued in the first half of 2020, commercial papers accounted for 70.86 percent as against the 23.95 percent raised through corporate bonds and 5.19 percent rights issues.
According to market analysts, Nigerian companies are most in need of working capital, especially during the COVID-19 era where there are tight liquidity and cash flow problems. Hence, the preference for commercial papers over bonds, as the latter is issued typically for long-term projects.
Ayorinde Akinloye, a research analyst at CSL Stockbrokers, says the single-digit interest rate on commercial papers as against the double digits for bonds is the major driver of corporates increased appetite for commercial paper.
“Raising long-term capital like bonds is more expensive than raising short-term capital like commercial paper. Thus, I believe these companies would like to ensure they keep finance cost as reasonable as possible given operating performance in 2020 may not be solid,” Akinloye notes.
Analysis of the data by FMDQ Securities Exchange shows that between January and June 2020, a total of N466.6 billion commercial papers were issued by corporates at an average interest rate of 6.5 percent.
While the commercial papers that were issued in the first six months of this year were over 100 percent higher than the N224.56 billion raised in the comparable period of 2019, FMDQ data show the average interest rate recorded in 2020 was almost 50 percent less than the 11.98 percent reported last year.
“The interest rates on the short-term instruments are significantly lower than bonds. Also, I think some of the companies are also testing the water with commercial papers before advancing with bonds,” Ayodeji Ebo, managing director, Afrinvest Securities Limited, states, adding that he expects to see more corporate bonds before the end of the year if interest rate environment remains at current levels.
Commercial papers are money-market security issued by large corporations to obtain funds to meet short-term debt obligations like payroll, and is backed only by an issuing bank or company’s promise to pay the face amount on the maturity date, which is usually in 270 days or less.
Corporate bonds, on the other hand, are debt issued by companies in order to raise long-term capital. With this type of instrument, investors effectively lend money to companies in return for high-interest payment, higher than government bonds as it comes with more risk.
According to Yinka Ademuwagun, research analyst at United Capital, the impact of COVID-19 on companies’ revenue stream is one of the key drivers of corporates rush for commercial papers as compared to bonds.
“COVID-19 came as a shock and so most companies had revenue challenges due to the decline in economic activities. Companies needed to raise quick cash like short-term cash plug,”
Ademuwagun says, adding that rather than the companies accessing capital from banks at 14-15 percent, “It’s better to go to the fixed income market to raise capital at say 7 percent.”
Meanwhile, the Central Bank of Nigeria (CBN) slashed the Monetary Policy Rate (MPR) by 100 basis points to 12.5 percent to spur lending to the economy, which faces imminent recession on twin pressures of COVID-19 pandemic and low oil prices.
Out of the 27 companies tracked on FMDQ that have gone to the market to tap from the low-interest environment in the first half of 2020, United Bank for Africa (UBA) is one of the few that leveraged the opportunity to restructure its financing cost by redeeming a bond it issued six years ago.
Instead of paying 16.45 percent interest on its 7-year bonds, UBA said it redeemed its outstanding N30.5 billion bonds issued in December 2014 and due to mature December 2021 on June 30, 2020.
With the decision by UBA to make an early call on its bonds, the commercial bank would be saving about 6 percent as the yield on a 7-year bond is currently at about 10 percent.
“We suggest that companies should also begin to consider issuing corporate bonds, which is more long term to refinance current long-term debt as well as expansion,” Ebo says, adding that long-term capital will better position the companies in the next 1-2 years as the economy return to positive growth.
Ebo advises that with the limited investment options amid expected high T-bills maturity, companies should take advantage of the low-interest rate to restructure their funding sources.
Meanwhile, yields on both T-bills and bonds instruments have hit a bottom record from a double interest rate enjoyed some four years ago, and according to industry analysts, the low yield environment is an opportunity ready to be tapped.
Interest rates in Nigeria have always been high due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as a means of attracting US dollar to stabilise the naira, but the recent OMO policy by the Central Bank, which prevents domestic investors from participating in the auction is one of the drivers of the country’s low interest.
