The issuance of short-term corporate debt spiked in the first quarter of this years as 28 Nigerian firms took advantage of the low cost of finance and short maturity period to bolster their working capital.
Data obtained from FMDQ Group showed that 28 firms issued commercial papers worth N507 billion in the first quarter, compared to the N175.4 billion raised in the corresponding period of 2022.
Luqman Agboola, head of research at Sofidam Capital, attributed the surge to the low yield environment in the treasury bills market, which enabled companies to access the market to raise funds through commercial papers.
He said that with lending rates soaring at an unprecedented level, companies in the country have been exploring creative ways to mobilise funds at affordable rates.
BusinessDay findings showed that companies issued commercial papers across financial services, information and communication technology, cement, trade, agriculture, manufacturing, services and real estate sectors.
The companies include MTN Nigeria, Julius Berger, DLM Capital and Dangote Cement.
“Corporate issuance, which also includes commercial papers, reacts a lot to interest rates, which have seen a significant increase between last year and this year,” Olaolu Boboye, a senior analyst at Cardinal Stone, said.
Between 2019 and 2021, low interest rates spurred companies to take on money debt to finance their short-term working capital needs and reduce existing obligations as central banks slashed monetary policy rates to shield their economies from the coronavirus pestilence.
However, starting from the second quarter of 2022, the Central Bank of Nigeria has been hiking the benchmark interest rate as it seeks to tame rising inflation brought on by the Russia-Ukraine war that led to a sharp rise in commodities prices.
“Companies are exploring the debt market, including seeking commercial papers, which are short-term and may provide some sort of bridge finance pending when there is clarity in the rate environment,” Kelvin Atafiri, CEO of Cavazanni Human Capital Limited, said.
Commercial papers are money-market securities issued by large corporations to obtain funds to meet short-term debt obligations like payroll and are backed only by an issuing bank or company’s promise to pay the face amount on the maturity date, which is usually in 270 days or less.
“We can’t say commercial paper is better than equity or vice versa. They both have advantages and disadvantages. The use of funds determines the purpose of funds and the funding source required,” Atafiri said.
“The issuance of commercial papers by firms is to meet working capital requirements. Also, it is cheaper to issue while equity is long-term and expensive compared to debt instruments generally,” Sesan Adeyeye, an analyst at CSL Stockbrokers Limited, said.
According to Adeyeye, equity is used to finance the growth of the business either internally through business expansion or inorganically through mergers and acquisitions.
In the first quarter of 2023, MTN Nigeria led the pack with the issuance of N125 billion commercial papers to boost its short-term working capital and funding requirements.
The commercial papers included a 188-day CP at a yield of 11.00 percent and 267-day CP at a yield of 12.50 per cent. The CP issuance was completed on 1 March 2023.
Dangote Cement raised N50 billion under its N150 billion CP programme.
The exercise began on January 30 and was concluded on February 2, with the cement maker saying the funds raised were intended for financing the company’s working capital needs and for general corporate objectives.
Nigerian Breweries raised N20 billion from the debt market to meet its cash needs in three series in January.
BusinessDay reported earlier that the repayment date for Series 1 would be for a tenor of 91 days, Series 2 would be for 120 days, and Series 3 would be for 154 days.
In February, DLM Capital Group raised N5.304 billion through the issuance of its N5 billion Series 10 and 11 CP notes under its N20 billion CP issuance programme, which was 106 percent subscribed.
The 180-day-tenor Series 10 and 268-day-tenor Series 11 were both issued on January 18, with maturity dates of July and October 2023, respectively.