High Interest Rate: Companies Dump Bank Loans For Commercial Papers

By AYOOLA OLAOLUWA

With Commercial Papers (CPs) rates trading lower than what Deposit Money Banks (DMBs) are lending, Nigerian companies are increasingly dumping banks’ loans and accessing funds through CPs, resulting in a jump in the market volume of CPs traded in the last four and half years, Business Hallmark findings can reveal.

Commercial Papers (Cps), according to the FMDQ Securities Exchange Limited, are unsecured short term debt instruments issued by companies to borrow from the investing public as alternative to bank loans which comes with high interest rates.

Like Treasury Bills, they are typically issued at a discount and redeemed at par (face value amount) upon maturity. The maturity of these papers do not last beyond 270 days in the Nigerian financial markets.

According to an analysis of data mined from the FMDQ Exchange, corporate organisations operating in the country raised N4.29trillion through commercial papers from 2018 to 2020.
In the same vein, companies requiring short-term capital registered CPs worth N1.806 trillion and quoted N421.7billion on the exchange between January and December of 2021.

Also, Nigerian companies raised N249 billion from commercial papers in the first six months (January to June) of 2021. In all, a whooping sum of N4.960.7trillion was realised from Commercial Papers by Nigerian companies in need of funds between January 2018 and June 2022.

According to findings, most commercial paper investors are from the financial sector, consisting of banks and insurance companies, individuals, corporate and incorporated companies and foreign institutional investors.
For instance, the 2021 report showed that Coronation Merchant Bank Limited topped the list of companies with the highest CPs realised with N74.54billion, closely followed by MTN Nigeria with N73.51billion.

Dangote Cement Plc came third after raising N41 billion in the year under review. Also on the list are two commercial banks, Stanbic IBTC Bank Plc and Union Bank of Nigeria Plc. While Stanbic IBTC was able to raise N30.3billion, Union bank raised N34.96 billion.

The half-year ended June 30, 2022 report showed that MTN Nigeria came top with N127 billion CP. According to the FMDQ data, MTN Nigeria issued Series 1 & 2 Commercial Papers (CPs) under its registered N150 billion programme.

They consisted two tenors – Series 1, a 184-day series issuance priced at 7.50% yield and the 254-day Series 2 priced at 8.50% yield.
MTN is closely followed by Lekki Gardens Estate which issued N25 billion Commercial Paper and NOVA Merchant Bank which issued N20 billion Series 1 & 2 Commercial Papers under its N50 billion CP Programme.

Others are UAC of Nigeria Plc, which completed its maiden N18.7 billion Series 1 and 2 Commercial Paper issuance under its established N45 billion programme; FBNQuest Merchant Bank which issued N15 billion Commercial Paper; Rand Merchant Bank (RMB) Nigeria Limited sold N15 billion in CP to investors; Veritasi Homes, N10 billion Commercial Paper; United Capital Plc N12.48 billion Series 8 Commercial Paper and Neveah Limited which issued N5.7 billion Series 3 and Series 4 Commercial Paper Programme.

An analyst at PAC Holdings, Mr. Wole Adeyeye, while speaking on the rush for commercial papers by companies, explained that most companies see CPs as one of the cheapest ways to increase their capital since yields on short-term instruments are relatively low compared to other instruments.

“Rates are actually dropping across the board. When you look at Treasury Bills auction results, you will notice that rates are actually dropping. What is happening in TB market is what is actually happening in CP.

“If these companies were to borrow from banks, they would have likely gotten it at least 15 per cent interest rate. This is even because they are big corporations. If it were smaller companies, they would have probably gotten it from18 percent interest rate upward,” Adeyeye stated.

Speaking further on the advantages of CPs, Adeyeye maintained that an active CP paper market provides companies with the opportunity to raise capital to meet their short-term funding obligations.

“CPs typically do not create a lien on the company’s assets, and this creates room for enhanced operational flexibility.

“In addition, interest on the debt is normally tax exempt and can be deducted from the company’s tax return, lowering the actual cost of the loan to the company. Thus, commercial papers impact the ability of companies to remain competitive and sustainable.

“As an investment tool, CPs help to diversify an investor’s portfolio, thereby reducing the overall portfolio risk. The short-term nature of CPs also permits a quick return on investment and allows investors remain relatively liquid.
“All of these enhance a vibrant and robust financial system thereby effectively and invariably contributing to the country’s economic growth and development”, declared the analyst.

Also speaking on the spike in the issuance of commercial papers, FMDQ noted that the instrument typically does not create a lien on the company’s assets, and that this creates room for enhanced operational flexibility.

“In addition, interest on the debt is normally tax exempt and can be deducted from the company’s tax return, lowering the actual cost of the loan to the company. Thus, commercial papers impact the ability of companies to remain competitive and sustainable.

“As an investment tool, commercial papers help to diversify an investor’s portfolio thereby reducing the overall portfolio risk. The short-term nature of CP also permit a quick return on investment and allow investors remain relatively liquid.

“All of these enhance a vibrant and robust financial system thereby effectively and invariably contributing to the country’s economic growth and development,” the exchange disclosed.

The exchange also boasted that the timely admission of the issued CPs and in general, all securities on the exchange was a testament of the efficiency of its securities quotation process.

However, the Managing Director of Highcap Securities Limited, Mr. David Adnori, argued that big companies are going for commercial papers, not because the interest rate on CP is low, but because they needed short term fund to meet their daily business operations.

“Not that the interest rate on CP is low, just that these companies need short term fund to meet their daily business obligations.

“Some of these companies might be having a short fall in working capital. Short term fund is to finance working capital to remain in business.

“Some might have short-term opportunities to grow their businesses and decided to take advantage of CP to remain buoyant”, Adnori explained.

The Central Bank of Nigeria (CBN), it would be recalled, had during its Monetary Policy Committee (MPC) meeting in Abuja on May 24, 2022, raised interest rate to 13 per cent from 11.5 per cent which it had been retained since May 2020.

Justifying the raise, CBN Governor, Godwin Emefiele, said the MPC is suspicious there might be an aggressive accretion of inflation.
However, experts argued that the rate hike is a disincentive to businesses, particularly small ones, arguing that the prevailing interest rate charged by banks had hurt and will continue to harm businesses in the country.