Big blue-chip companies are showing preference for commercial papers as against the conventional bank loans and shares sale to meet their funding needs, findings have shown.
Financial experts, who spoke on the drive for CP, said it provided cheap funds for the firms and removed the cumbersome process associated with other means of raising capital.
Some of the corporates that have turned to CP to raise funds include MTN Nigeria Communications Plc, which recently notified the Nigerian Stock Exchange of its successful issuance of N100bn series I & II notes CP programme.
In April, Flour Mills of Nigeria Plc announced the issuance of N30bn (13 and 14), under its N100bn CP programme which was registered with the FMDQ OTC Plc.
In the same month, United Capital Plc confirmed that it successfully raised N5.3bn in a series one and two CP issuance, under its N20bn programme registered with the FMDQ Securities Exchange.
Similarly, in the same period, Nigerian Breweries Plc informed the NSE of the continuation of its CP with the launch of series seven and eight of the programme, which aimed to raise up to a maximum of N48bn to support the company’s short- term funding needs.
A former President, Association of National Accountants of Nigeria, Dr Sam Nzekwe, observed that the increase in the issuance of CP by corporates was fueled by investors’ patronage.
He said the companies were avoiding fund raise through shares or borrowing from banks because CP offered them cheaper money with lower stress.
Nzekwe said, “It is very easy for them to raise funds through CP because by the time you go to the banks, the lenders will be demanding over 20 per cent interest rate from the companies.
“But it is cheaper for them to get funds from commercial papers at a lower interest rate, and it is easier and less cumbersome than shares.”
He also said that the companies could borrow for a much longer tenor than the banks and get bigger yields.
Speaking on investors’ patronage of CP, he said, “Most people will not like to put money in fixed deposit accounts because the banks removed interest rates on deposits. Most people will not like to put money there because they are getting almost zero per cent on them.
“People are looking for where to invest and they don’t know where to invest. So they prefer commercial papers to leaving money idle in banks.”
The Registrar/Chief Executive Officer, Institute of Credit Administration, Prof. Chris Onalo, said, “CP is easily convertible and like the full sovereign faith instruments, it has a bit of confidence in it.
“But my worry is that when there is a deflation of the sovereign credit rating for the country, it will automatically affect whatever instrument that is coming from the sovereign power which in this case is commercial papers.
“Probably now, it is the most credible source of raising funds than to go to the conventional lending institution with its attendant cost of borrowing and the uncertainty that surrounds it because of risk, but it is still the best option for blue-chip companies.”
July 2, 2020