More Firms Issue CPs to Tap Short-term Funding

More corporates have continued to fund their operations through issuance of commercial papers (CPs) to cover their shortterm financing needs.

According to experts, the trend would continue until after the general elections and the political uncertainties are over.

CPs are unsecured promissory notes with a fixed maturity are issued by companies to raise money to meet short term finance obligations.

The notes are backed by the promise of the issuers to repay based on certain agreed terms.

They present a cost-effective and stable means of sourcing scarce capital as against to bank loans and provide investors avenue to diversify their portfolios and given their short-term nature, they permitting high relative return on investment and allow investors to remain relatively liquid.

Companies usually finance operations through equities and debt capital. But the equities market has offered limited opportunities for firms to raise funds due to low demand by investors. Also, the federal government’s dominance in the fixed income securities market have led to the crowding out of corporates, who have now resorted to alternative funding window such as CPs.

For instance, Flour Mills of Nigeria Plc last week raised N6 billion in the sixth series of its N100 billion CP Programme to support its short-term funding requirements.

Union Bank of Nigeria Plc also raised N20 billion last month from the market, in 90- Day and 181-Day tenors under its N100 billion CP Programme to finance its working capital.

Many companies exploited the CP market last year to fund their operations. For instance, the FMDQ OTC Securities Exchange registered CPs worth N505 billion last year.

Companies such as Dangote Cement Plc, Flour Mills of Nigeria Plc, Access Bank Plc, Union Bank of Nigeria Plc, Sterling Bank Plc, among others benefitted from the market.

Market experts said more corporate companies would focus on CPs this year given the lower interest rates and the shorter duration, which is attractive to investors and enable companies make better forecasts and projections.

Commenting on the rising appetite for CPs, the Group Chief Executive Officer of Emerging Africa Capital Group, Mrs. Oluwatoyin Sanni said when

risk is high and future hard to predict, investors would move to shorter end of the market.

“CP gives the shorter end of the market so investors feel that they can take a bet in the near future and it is helpful for the companies to be able to raise capital within the time frame that investors are comfortable. And the FMDQ, being able to provide outlet for CPs issuances has helped to put some degree of confidence in the market,” she said.

In his explanation, the Group Chief Executive Officer of United Capital Plc, Mr. Peter Ashade said: “I think the relatively lower yield environment and lesser participation by the FGN in the domestic debt market (which hitherto, crowded out access to the domestic debt market by corporates) was the primary factor behind the increased corporate participation.”

The Co-founder of Cardinal Stone Partners Limited, Mr. Mohammed Garuba, had said CP issuance had increased largely because the banks have refused to reduce interest rate.