PenCom’s new commercial paper rules may crowd out small businesses

The new commercial paper rules by the National Pension Commission (PenCom) could crowd out small businesses, according to analysts.

PenCom recently released additional requirements for Pension Fund Administrators (PFAs) investing in Commercial Papers (CPs). It said that the decision was taken to enhance risk management in the investment of pension funds.

PenCom said PFAs can only invest in CPs issued by corporate entities with a valid minimum credit rating of ‘A.’

The 20- year-old regulator also said that investments in CPs issued by corporate entities with a credit rating of ‘BBB’ may be considered if they are guaranteed by an agency backed by a sovereign entity, a multilateral development finance organisation (MDFO) with a minimum credit rating of ‘A,’ or a commercial bank with a minimum credit rating of ‘A.’

Some analysts believe that these new requirements will further crowd out financing for small businesses who already struggle with high interest rates on loans from banks.

Read also: PenCom strengthens regulations on pension fund investments in commercial papers

“Pencom is going to clip this market. Only a few big names will have it good with this latest development, and it means that the cost of capital will be higher for smaller companies and relatively lower for the big companies, ” Abdulrauf Bello, portfolio manager, Cowrywise, said.

CPs are short-term debt instruments issued by corporations typically to finance short-term liabilities.

In 2024, Nigerian companies faced funding squeeze as investors flocked to high-yielding government debt instruments.

According to data from FMDQ, the total number of CP issuances in 2024 decreased to 133 from 140 issued by various companies in the previous year.

Also, the total amount issued dipped by 12 percent to N790.4 billion in 2024 from N900 billion the previous year.

Michael Oyebola, an analyst at Moneycounsellors, said that the previous the commercial paper regime was a free for all, noting that while the issuing houses did a good job in trying to protect the safety of funds, it was difficult in Nigeria’s current environment for such stringent rules not to be put in place.

“It is important to sanitise the system and enforce certain rules and regulations and make sure that the issue has been complied with. Once the issue has been complied with, then they will relax a bit of the rules.”

Oyebola further said that though smaller businesses need facilities and are at risk of being crowded out, the rules are needed. He hinged his reason on smaller businesses’ vulnerability to default in payment.

He noted that the rules will not affect the returns on pension funds as there are other high-yield instruments to invest in.

“In terms of whether it will affect rates, no, the market is competitive enough. They also invest in other instruments, which include treasury bills,” he said.

The CP market is barely N1 trillion in size, very little compared to the pension fund industry with a total asset under management of N22.3 trillion as at November.

In December 2024, PenCom temporarily halted investments in CPs issued by limited liability companies by Licensed Pension Fund Administrators (LPFAs).

“The Commission has noted the increased investment by Licensed Pension Fund Administrators (LPFAs) in Commercial Papers issued by limited liability companies,” it said in the statement.

It noted that it had observed that the issuing companies had engaged capital market operators as Issuing and Placing Agents (IPAs) to manage the issuance and placement of these CPs.