The lull in the primary segment of the equities market is currently taking a toll on the stock market even as corporate entities shun long-term financing options to explore opportunities in short-term instruments with the total value of commercial papers (CPs) quoted on FMDQ Securities Exchange rising to N1.5 trillion within 10 months.
On account of the harsh interest environment, companies have resorted to alternative means of raising capital with the majority exploring opportunities in CPs.
Also, the lull in the primary equity segment of the stock market has made it difficult for companies to float shares successfully on the floor of the exchange, leading to more activities in short-term instruments.
CP is an unsecured short-term debt instrument issued by corporations and is typically used to finance short-term liabilities such as payroll, accounts payable, and inventories.
A breakdown of the total value of CPs quoted on FMDQ Exchange in January 2023 stood at N83.20 billion. In February, it rose to ₦101.84 billion. The figure increased to ₦354.18 billion in March and N114.27 billion was issued in April. It stood at ₦163.77 billion in May 2023.
For June, July, August, September and October 2023, the exchange recorded ₦52.13 billion, N117.32 billion, ₦239.04 billion, ₦146.22 billion and ₦36.51 billion CP respectively.
Within the period, Flour Mills of Nigeria Plc, Nigerian Breweries Plc and MTN Nigeria Communication Plc were among the corporates that have listed CPs on FMDQ Exchange.
MTN Nigeria Communication completed its series four and five CP issuance under its N150 billion CP issuance programme.
Dangote Cement quoted N44 billion series four and N46 billion series five CP under its N150 billion CP Programme while Nigerian Breweries listed N16.49 billion series one, N5.03 billion series two and N45.74 billion series three CPs under its N100 billion CP.
In addition, Flour Mills of Nigeria declared N13.33 billion series one and N51.64 billion series two CP under its N200.00 billion CP Issuance programme.
Head Equity, Planet Capital, Dr Paul Uzum, said yields on CPs are on average higher than treasury bill rates and any other with yields around 17 to 20 per cent per annum.
He pointed out that many investors always prefer debt instruments because when firms raise equities, they are only obligated to pay dividends which is at the discretion of their management.
He said: “CP is short-term financing with a maturity of 270 days or less. Firms are taking this option of short-term financing because of the prevailing high-interest rates.
“If you issue bonds with long-term duration at the prevailing high-interest rate, the company will suffer if in two years the economy stabilises and interest rate falls significantly.
“In such a case, you would have locked in the financial commitment to investors for many years at today’s high-interest rate. So companies will rather opt for short-term financing like CPs which have less than a year maturity for now.”
Uzum said firms are currently struggling to raise funds through the equities market in Nigeria, adding that only a few like MTN have succeeded in recent times. “Nigerians do not trust other people with their money. That is why firms focus more on debt capital, which is easier to raise in a high-interest rate environment.”
Vice President of Highcap Securities, David Adonri, said many enterprises issue CPs when bank lending rates become prohibitive.
He pointed out that the vibrancy of the CP market is a good development for the economy but added that it is an indication that the economy is dominated by trading activities rather than investment.
