People & Money

Dangote, Mtn and Others Raise Over N5 Trillion Via Commercial Papers

The issuance of Commercial Papers (CPs) has become the new trend in the Nigerian capital market, replacing traditional equity financing and primary market debt issuance such as bond listing. According to data obtained from the FMDQ Exchange, Nigerian companies have raised over N5 trillion through commercial papers in the last three years, with notable participants including Dangote Cement Plc, Coronation Merchant Bank, United Capital Plc, Cardinal Stone Partners, Total, and MTN Nigeria.

A commercial paper is an unsecured, short-term financial instrument issued by corporations seeking to raise funds from the public on a short-term basis as an alternative to bank credit to satisfy their short-term capital needs. Commercial Papers, often known as CPs, mature in 270 days, after which the company returns the monies raised to the original owner (investors).

Why are firms rushing the commercial papers markets?

Just this year, FMDQ Exchange Limited has listed commercial papers worth over N41 billion from companies doing business in Nigeria, including BabaGona Farmer Services Nigeria Limited, Mixta Real Estate Plc, and MeCure Industries Limited.

Commercial papers are used by firms to meet their short-term needs such as financing their payables, inventories, and other short-term liabilities. The proceeds from  Commercial paper issuances can also be used by companies for project expansion and trade financing. For example, a company might raise money to finance the exportation of its products to foreign buyers.

When businesses require a cash injection to meet working capital requirements, they turn to commercial papers rather than borrowing from Nigerian commercial banks on a short-term basis. CPs are typically issued at a discount to face value, reflecting the prevailing market interest rates in the country. As a result, it is cheaper for companies to raise capital through the commercial paper markets than borrowing from commercial banks because bank lending comes with higher interest rates.

However, commercial paper issuances often involve a large capital outlay with the size of the issue and the limit set by the issuer. CBN rules set the minimum issue value at N100m, which means that companies can raise a large amount of money to meet their needs. Also, the time frame it takes companies to raise capital through commercial paper issuance is shorter when compared to fundraising through the equities market. For instance, it took MTN Nigeria Communications Plc 7 days to raise N200 billion naira from its commercial paper issuance in 2021 which was oversubscribed by 400%.

Also Read: CardinalStone Raises N5 Billion, Lists Bond on FMDQ

Unlike equity financing, where investors become co-owners of the company, debt financing is less expensive since it does not require an organisation to give up control to investors as a prerequisite of financing. When commercial papers are issued, the lender is only entitled to the repayment of the loan’s principal plus interest and has no direct claim on the business’s future profits.

The weak macroeconomic environment, persistent volatility of the stock market, low participation from investors and other bottlenecks linked to the stock market makes equity financing unattractive to companies. Also, the high transaction costs and the complicated application process in issuing equities are some of the factors that have attracted companies to the commercial markets space.

Investors participating in Commercial Papers

Retail and institutional investors (Pension Fund Administrators, Insurance Firms, and Asset Managers) seeking to diversify their investment portfolios, have low-risk exposure and earn good returns invest in commercial paper instruments. Commercial papers, like other debt securities, offer a fixed rate of return, and investors receive their principal as well as the agreed-upon interest rates at maturity.

The CBN’s rules requiring companies to issue a minimum of N100 million in commercial paper markets are a huge disadvantage for the CPs market. Because commercial paper issuances are large, companies typically make their minimum investment subscription amount as high as N5 million, allowing institutional investors to invest in large volumes. Individual and retail investors who cannot afford to invest large sums of money in commercial paper instruments end up squeezed out.

Commercial papers are typically unregulated by the Securities and Exchange Commission, putting investors who invest in them at risk of default. However, various developments in the Commercial paper markets have mitigated this.

As a means of providing investor protection, the CBN rules dictate that companies intending to issue commercial papers must meet certain requirements. An organisation must reveal the identities of its management board, have three years of audited financial accounts, disclose the reasons for issuing the CP, and all material financial facts that may affect the transaction must be disclosed accordingly. Since 2014, the FMDQ Exchange in Lagos has championed the Nigerian commercial paper market by providing a platform for companies to quote their commercial paper instruments and for investors to invest directly in these instruments.

Over N150 billion in commercial papers are currently quoted on the FMDQ exchange and are accessible for secondary market investment at the time of writing this article. This demonstrates how liquid and appealing the commercial paper market is to companies seeking funding and investors seeking to invest in commercial paper.

Valency Agro Nigeria Limited and DLM Capital Group Limited respectively

have issued commercial papers worth N2 billion and N5 billion; both are open to the public for investment.

Yunus Ibrahim

Yunus advocates for mission-driven, underrepresented founders, particularly women, first-generation entrepreneurs, and people of colour. With over 3 years of experience in Venture Capital, ESG, Corporate Finance, and Research, Yunus has gained insights into various markets in Sub-Saharan Africa and worked with diverse founders to build the prosperous African continent we all desire. He received a bachelor's degree in Accounting from the University of Lagos; and was 1 of 60 African scholars selected to study Technology, Entrepreneurship, and Design at the Nigerian University of Technology and Management (NUTM) on a full-ride scholarship.

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