Nigerian companies are increasingly opting to issue short-term debt rather than longer-term notes to avoid locking in high borrowing costs.
Companies issued ₦1.8 trillion ($1.2 billion) in debt maturing in less than a year in the 13 months through June, compared with just 197.3 billion naira raised in two- to seven-year tenors over the same period, data compiled by FMDQ, which tracks trading activity in the commercial hub, Lagos, shows.
“Long-term borrowing at today’s double-digit yields would lock firms into very expensive debt,” hence their recourse to borrow short-term, Chika Mbonu, chief executive officer of KSBC Advisory Partners Ltd., a Lagos-based consultancy, said by phone.
“Once rates stabilise and investor confidence in long-term inflation control deepens, we may see a pick-up” in longer-term bond issuance, he said.
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Nigeria’s central bank has lifted its key interest rate by 16 percentage points to 27.5% in the past three years to contain double-digit inflation that’s been stoked by a 73% depreciation in the naira against the dollar.
It also raised private banks’ cash-reserve ratio to 50% in September to tighten liquidity, prompting them to turn to short-term debt for funding.
The yield on short-term notes issued by Nigerian firms stands at about 25%, lower than the 30.1% interest charged on bank loans of similar duration.
Financial services firms — including Access Holdings Plc, Stanbic IBTC Holdings Plc and FSDH Merchant Bank Ltd. — accounted for 53.9% of short-term notes issued over the past year, according to FMDQ. The remainder came from a mix of large and smaller companies such as MTN Nigeria Communications Plc, Dangote Cement Plc and Lagos Free Zone Co.
“By issuing commercial paper, both corporates and banks are able to access liquidity at a more competitive rate,” said Ayodeji Ebo, managing director at Optimus by Afrinvest.
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“Interest rates are expected to remain elevated for the rest of the year. At best, we may see a modest cut of about 25 to 50 basis points in the monetary policy rate.”
