Bank loans

High interest rate: companies abandon bank loans for commercial paper

CBN building

By AYOOLA OLAOLUWA

With commercial paper (CP) rates trading at levels below those lent by depository banks (DMBs), Nigerian companies are increasingly abandoning bank lending and accessing funds through CPs, which leads to an increase in the volume of the CP market traded over the past four years. six months, Business Hallmark’s findings may reveal.

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

Like treasury bills, they are usually issued at a discount and redeemed at par (face value) at maturity. The maturity of these papers does not last beyond 270 days on the Nigerian financial markets.

According to an analysis of data extracted from the FMDQ exchange, companies operating in the country raised 4.29 trillion naira through commercial papers from 2018 to 2020.
In the same vein, companies in need of short-term capital registered CPs worth N1.806 billion and listed N421.7 billion on the stock exchange between January and December 2021.

Furthermore, Nigerian companies raised N249 billion from commercial papers in the first six months (January to June) of 2021. In total, a colossal sum of N4,960,700 billion was raised from commercial papers by Nigerian companies in need of funds between January 2018 and June 2022.

According to the findings, most commercial paper investors belong to the financial sector, which consists of banks and insurance companies, individuals, corporations and incorporated businesses, and foreign institutional investors.
For example, the 2021 report showed that Coronation Merchant Bank Limited topped the list of companies with the highest CPs achieved with 74.54 billion naira, followed closely by MTN Nigeria with 73.51 billion naira.

Dangote Cement Plc came in 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 N30.3 billion, Union Bank raised N34.96 billion.

The semi-annual report ending June 30, 2022 showed that MTN Nigeria came out on top with 127 billion naira CP. According to FMDQ data, MTN Nigeria has issued Series 1 and 2 Commercial Papers (CPs) under its N150 billion registered program.

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

The others are UAC of Nigeria Plc, which completed its first series 1 and 2 commercial paper issuance of N18.7 billion under its established N45 billion program; FBNQuest Merchant Bank which issued N15 billion of commercial paper; Rand Merchant Bank (RMB) Nigeria Limited sold 15 billion naira 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 program.

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

“Rates are actually down across the board. When you look at the results of treasury bill auctions, you’ll notice that the rates are actually falling. What happens in the TB market is what really happens on the CP.

“If these companies were to borrow from the banks, they would probably have obtained an interest rate of at least 15%. It is even because they are big companies. If it was small businesses, they probably would have gotten it from 18% higher interest rates,” Adeyeye said.

Speaking in more detail about the benefits of CPs, Adeyeye argued that an active CP paper market provides companies with the opportunity to raise capital to meet their short-term funding obligations.

“PCs generally do not create a lien on corporate assets, which creates room for increased operational flexibility.

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

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

Also speaking about the surge in the issuance of commercial paper, the FMDQ noted that the instrument does not generally create a lien on company assets, and that this creates room for increased operational flexibility.

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

“As an investment tool, commercial paper helps diversify an investor’s portfolio, thereby reducing overall portfolio risk. The short-term nature of CP also allows for a quick return on investment and allows investors to remain relatively liquid.

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

The exchange has also boasted that the timely admission of issued PCs and, in general, of all securities on the exchange is a testament to the efficiency of its securities listing process.

However, the managing director of Highcap Securities Limited, Mr David Adnori, argued that big companies are turning to commercial paper, not because the interest rate on CP is low, but because they needed short-term funds to meet their day-to-day business operations.

“Not that CP’s interest rate is low, just that these companies need short-term funds to meet their day-to-day business obligations.

“Some of these businesses may have insufficient working capital. The short-term fund is used to finance working capital to remain in business.

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

The Central Bank of Nigeria (CBN), it is recalled, had during its meeting of the Monetary Policy Committee (MPC) in Abuja on May 24, 2022, raised the interest rate to 13% against 11.5% qu he had retained since May. 2020.

Justifying the increase, CBN Governor Godwin Emefiele said the MPC suspects there could be an aggressive rise in inflation.
However, experts have argued that the rate hike is discouraging businesses, especially small ones, arguing that the interest rate charged by banks has hurt and will continue to hurt businesses in the country.