1 week ago
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…Investors, firms face tough choices
By Chinwendu Obienyi
Amid tightening liquidity and dwindling access to capital (especially short-term financing), investors and companies in Nigeria find themselves navigating a tempest.
Their precarious position has been exacerbated by a funding squeeze, which in itself is accentuated by a temporary halt in issuance of commercial papers (CPs).
Commercial paper is a short-term, unsecured debt tool used by big corporations to secure finances. This helps companies raise funds for their day-to-day operations like payrolls, inventories and more.
The maturity period for these commercial papers varies between 1 to 270 days. Such short-term maturity of these instruments makes them ideal for resolving short-term capital requirements without obligating any long-term commitments associated with other debt forms.
However, despite the reopening of admission services in Nigeria’s Commercial Paper (CP) market, uncertainty continues to cloud investor and corporate confidence, with many wary of the fate of their issuances. The lingering apprehension has drawn concern from analysts, who caution that the prevailing unease could have far-reaching implications for the 2024 and 2025 CP performance reports, traditionally released by the Financial Markets Dealers Quotation (FMDQ) Securities Exchange.
A market notice issued by the securities exchange last month noted that effective from December 30, 2024, the processing of new and ongoing applications in respect of prospective CP programme registrations, revisions/extensions and issuances/quotations had been suspended pursuant to the release of the new rule on the issuance of commercial papers by the Securities and Exchange Commission (SEC).
The commission, while rolling out new rules and amendments, said that all issuances proposed and approved will ensure that its credit rating shall not be below investment grade.
SEC said, “The maturity date of all outstanding CP issues shall fall within the validity period of the Issuer’s rating filed with the Commission. Where the rating will expire prior to the maturity of the CPs, the issuer shall provide an extended or renewed investment-grade rating, no later than five business days prior to the expiration of the initial rating;
“CPs shall be issued or sold to qualified institutional investors, high net worth individuals and retail investors. Offerings of CPs by way of a private placement shall not exceed five working days from the date the issue opens for subscription. Any unsold portion of the issue after five working days of its opening for subscription shall not be issued.
For a public offer, the offer period shall not exceed 10 working days; Also, issuers of NICPs shall in addition to these rules, comply with all relevant laws, Shari’ah rulings, principles and standards as issued by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), or other standard setters, recognised by the Commission”.
Owing to these amendments, FMDQ stated that the suspension applies to applications for which the filing of all relevant documentation has been completed, applications for which the filing of all relevant documentation is yet to be completed, as well as prospective and ongoing CP offers under active CP programmes.
The notice noted that the FMDQ initiated relevant engagements with the Commission on the implementation and operationalisation of the New CP Rule to ensure effective and efficient transition accordingly.
While FMDQ has since resumed admission services for CP issuances, uncertainty remains among investors and companies regarding their issuances
A report from PwC revealed that a total of N503 billion was raised through 76 commercial paper issuances by 32 entities on FMDQ in the first quarter (Q1) of 2024, representing a significant decrease of 37 per cent in value and 27 per cent in number of issuances compared to the same period in 2023, market analysts who spoke to Daily Sun, said that the suspension came at a time when the CP market was already experiencing a downturn.
According to them, the number of CP issuances decreased to 133 in 2024 from 140 in the previous year, and the total amount issued dropped by 12 per cent to N790.4 billion.
“Although the FMDQ had said this was done efficiently, I reckon that companies eyeing CPs for short-term funding may face significant implications due to the temporary suspension. Also, the suspension and uncertainty have likely increased costs for companies seeking to raise funds through CPs. This would now mean that investors may be more cautious about CP investments given the recent regulatory changes and market volatility”, a market analyst who did not want his name in print said.
He added that Nigeria’s 2025 N13 trillion budget deficit, funded through borrowings, may prolong the private sector crowding-out effect and added that the new SEC rules, including requirements for investment-grade ratings and restrictions on issuance periods, may further impact the CP market.
“Commercial paper issuances may decline in 2025 due to higher interest rates and increased debt burden. As the market adjusts to these changes, it will be crucial for both investors and companies to closely monitor developments in the Nigerian CP market throughout 2025”, he stated.
Nigerian companies raised N1.504 trillion through commercial papers on FMDQ in 2023, representing a significant increase of 499 per cent compared to the N251 billion raised in 2022 with a total of 56 companies utilised this financing method throughout 2023.
However, companies faced a funding squeeze last year as investors favoured high-yielding government debt instruments.
The trend led to increased borrowing costs for corporations, with some commercial papers being issued at rates as high as 30-35 per cent.
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