Following an extended period marked by a dearth of activity, significantly weakened issuer interest and diminished investor confidence, the Nigerian Commercial Paper (CP) market is cranking back to life, as registered CP Programmes on the FMDQ OTC Securities Exchange platform have crossed N1 trillion.
That’s up from zero levels four years ago in 2013 when CP activity came to a screeching halt, prior to the release of the Central Bank of Nigeria (CBN) Guidelines on the Issuance and Treatment of Bankers’ Acceptances and Commercial Paper (2009), and when opacity and market irregularities clouded the market.
The CP rally is good news for businesses looking to tap the debt market for short-term capital and investors looking to diversify their portfolios.
“The FMDQ- championed CP market reform since 2014, which was predicated on the back of the CBN Guidelines, has contributed, in no small measure, to the revival of the activities in the CP market, providing issuers a renewed opportunity to grow their businesses and meet short-term funding obligations as well as restoring the much-needed confidence required by investors to actively participate in the market,” some market players told Business Day.
FMDQ, in collaboration with the CBN and other relevant market stakeholders, embarked on key initiatives and strategies for the restoration of the Nigerian CP market back in 2014. And that is paying off.
FMDQ released the “FMDQ Commercial Paper Quotation Rules & Process” in 2014, following the receipt of the CBN’s “No Objection” on same, and focused efforts and the requisite resources to organise and resuscitate the market.
Issuers and market participants told Business Day that the Bola Onadele- led FMDQ has provided a reliable and efficient platform for registering, quoting and trading CPs, amongst other debt securities.
They say FMDQ has taken the most crucial steps towards promoting transparency, governance, integrity and efficiency, thereby regaining the lost interest and confidence in the Nigerian CP market.
Onadele says that has been achieved by adopting initiatives specifically targeted at reviving the market.
“Transparency, price discovery, liquidity, rollover governance (i.e. matured CPs are approved for rollover only with the consent of investors), efficient quotation processes are some of the transformation elements now evident in the Nigerian CP market today,” Onadele said.
“Issuers and investors alike are now able to effectively and sustainably contribute to the development of the nation’s debt markets,” Onadele, fondly called “Koko”, said.
Access Bank, Nigerian Breweries (N100 billion), Lafarge (N60 billion) and Flour Mills of Nigeria (N100 billion) are among Nigerian corporates that currently have CP programmes.
It is broadly expected that more corporates will issue commercial papers as yields further decline in the fixed income market, having already tumbled to an average of 10 percent from as high as 18 percent a year ago amid a change of tack in Nigeria that saw the federal government cut back on domestic debt supply to manage ballooning service costs and free up capital for the private sector.
It is therefore, commendable that at such a time when banks, non-bank financial institutions and small and medium-scale enterprises are striving to flourish despite the economic challenges in the country, the CP market can be looked to, to provide a viable, stable and cost-effective means for the achievement of their business goals.
CPs, which are short-term debt financing instruments issued for a period not exceeding two hundred and seventy (270) days, present a cost-effective and stable means of sourcing scarce capital when compared to traditional bank loans and enable businesses diversify their funding sources.
In addition, by accessing the CP market, businesses are able to build confidence in their brand as well as raise their corporate profiles ahead of tapping the market for longer-term debt such as bonds in preparation for the impact of banks implementation of Basel 3 liquidity management principles.
As an investible asset class, CPs are often sought by investors to diversify their portfolios, thus, enhancing overall portfolio return, with their short-term nature permitting high relative return on investment, and allowing these investors to remain relatively liquid.
Companies that have tapped the CP market have achieved significant reduction in their borrowing costs compared to bank loans.
Commercial bank lending rates aren’t letting up to the extent at which yields on domestic government bonds and Treasury bills have over the past one year.
Average bank lending rates stood at 25 percent as at end March 28, 2018 according to data collated by the Lagos-based economic advisory and research firm, Financial Derivatives Company.
Coming at a time when FMDQ has affirmed its commitment towards the development of the Nigerian debt capital markets (DCM) and its subsequent deepening and integration to its international counterparts, one can expect that the successes recorded by the Nigerian CP market can be cascaded into other aspects of the Nigerian financial markets within FMDQ’s purview.
“FMDQ has embraced the role of a change agent in the Nigerian financial market and it is expected that the OTC Exchange will not rest on it oars but continue to deploy initiatives to improve the prosperity of all categories of capital raising, investing and trading stakeholders – governments, businesses, and individuals – through its compelling activities in promoting access to capital, democratising investment, enhancing transfer of value and championing transfer of risk in the DCM,” Onadele added.