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Commercial paper market booms over credit crunch

Up 231.8% to N505.3bn
Private sector lending falls 3.9%

By Nkiruka Nnorom

The number of companies raising short term debt through commercial papers (CPs) programme from the capital market ballooned last year following reluctance by deposit money banks to allocate funds to the private sector.

Financial Vanguard’s checks revealed that a total of N505.30 billion was raised in 2018 through CPs programmes by various corporates, representing 231.8 percent rise over the N152.35 billion recorded in 2017.

Data obtained by Financial Vanguard showed that there was a total of 60 CPs quotations on the FMDQ OTC Securities Exchange against 33 CPs quotations in the previous year.

This followed continuous decline in credit allocation to businesses, according to operators in the capital market.

Available data showed that credit to the private sector fell by 3.9 percent in the fourth quarter (Q4) to December 31, 2018. Specifically, N15.13 trillion was allocated as credit to the private sector by banks as at Q4’18, compared to N15.74 trillion received by the private sector during the same period in 2017.

The banks’ lending again fell by 2.92 percent quarter-on-quarter (QoQ) from N15.59 trillion in Q3’18.

According to financial experts, banks’ reluctance to lend to the private sector stemmed from the harsh operating environment, which has made credit advancement to the real sector even more riskier.

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Speaking on these figures Mr. David Adonri, Managing Director/CEO, Highcap Securities, said a lot of companies are no longer enjoying credit from their bankers to the volume they need to run their businesses; that is why you see that corporates are resorting to raising money through commercial papers.

He explained that raising funds through issuance of commercial papers is similar to getting loans from banks especially in respect of fixed cost of the funds, but the difference is that the CP funds come from the general investing public.

Additionally, Adonri said that the recent rush to the CP market would not also be unconnected to the dearth of activity in the primary equities market. “You know the primary market has been dormant for a long time since a lot of companies cannot raise fund there. Of course, you have to look for an alternative source of funding; that is part of the reason why you see companies embracing commercial papers of late, though CPs are short term debt that are basically used to finance short term projects.”

The primary equities market was quiet for most of 2018 save for the listing of N1.89 billion shares of Skyway Aviation Handling Company Limited (SAHCOL) following its Initial Public Offer (IPO) and listing by introduction of Notore Chemical Industries Plc’s N100.75 billion shares. On the other hand, supplementary listing by corporates via rights issues fell by 31.73 percent to N240.83 billion against N352.75 billion in 2017.

 

Some CP issuance programmes in 2018

The key CP issuance programes include In February, UACN Property Development Company (UPDC) Plc, Access Bank Plc, Nigerian Breweries Plc, Sterling Bank Plc, Coronation Merchant Bank and Dangote Cement’s Plc, among others.

UPDC issued 3.93 billion under its N24.00 billion CP issuance programme; Access Bank issued N33.04 billion CP notes under its N100 billion CP Programme. In May, 2018, UPDC followed up with another N13.34 billion Series 22 – 28 CP Notes under its N24 billion CP Programme; Nigerian Breweries Plc’s N16.43 billion Series 11 & 12 CP Notes under its N100 billion CP programme was also issued, while Sterling Bank Plc issued a N18.69 billion Series 4 tranche B CP Notes under its N100 billion CP programme.

This was followed by the issuance of N20 billion CP by Coronation Merchant Bank and Dangote Cement’s Plc’s N50 billion on July.

The month of August saw key activities in the CP quotations space on the OTC Exchange, wherein the N100 billion CP programmes of Union Bank of Nigeria Plc and Flour Mills of Nigeria of Plc respectively, were registered on the OTC Exchange’s platform.

Again, Access Bank issued N28.79 billion Series 18 CP under its N100 billion CP Programme, Sterling Bank issued another N14.40 billion Series 6 and N32.58 billion Series 7 CP under its N100 billion CP Programme, while Flour Mills of Nigeria issued N8.01 billion Series 1 CP under its N100 billion CP Programme in September.

In December, the FMDQ Board approved the successful registration of the Mixta Real Estate Plc N15 billion CP programme and the Eterna Plc N10 billion CP programme. These are in addition to the approval for formal admission and quotation of the FBNQuest Merchant Bank Limited N7.42 billion Series 1 – 4 CPs under its N100 billion CP programme and the FSDH Merchant Bank Limited N257.57 million Series 7 and N15.08 billion Series 8 CPs under a N30.00 billion CP issuance programme.

 

FMDQ’s effort in reviving CP market

Commenting on its role in revitalising activities in the CP market after years of dormancy, FMDQ OTC Securities Exchange said that it has provided issuers 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. The CP market has crossed over N1 trillion in value from zero levels in 2013.

“There now appears to be hope for businesses looking to tap the debt market for short-term capital and investors looking to diversify their portfolios, as the FMDQ-championed CP market reform since 2014, which was predicated on the back of the Central Bank of Nigeria (CBN) Guidelines, has contributed, in no small measure, to the revival of the activities in the CP market.

“FMDQ has ably embraced the role of a change agent in the Nigerian financial market and it is expected that it 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 and use of technology in promoting access to capital,” the exchange said. It added that it recognises the potential of a fully-functional debt capital market and would continue to innovate and provide efficient services, as may be necessary, to support issuers, investors, intermediaries and other stakeholders, towards achieving an operationally excellent and competitive debt market.

 

Operators’ comments

Adonri explained that the introduction of Treasury Single Account, TSA, which has reduced the funds available to the banks for on-lending and difficulty in the economy have combined to frustrate funding availability to the private sector.

He said: “Two things are involved; because of this Treasury Single Account, TSA, the amount of money available to the banks to lend has diminished considerably. Secondly, the economy, generally, is not performing well and so, the risk of giving out loans has increased considerably. So, the banks are very conservative now in that respect. If you take those factors into consideration, you now begin to understand why the quantum of loans they are granting has reduced.”

In his own view, Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, said: “We are in the period of heightened political risk. At such periods, financial institutions are not aggressive in lending. What they do is that they invest in very liquid instruments while waiting for political and policy clarity to decide where to put their funds.

“Government defines economic direction because government policy determines where investors will put their money. The government policy can make or mar any sector of the economy and banks are conscious of that.”

 

Way forward

According to Adonri, the economy needs a new breather that would rejuvenate it and encourage banks to lend more. He stated: “It is better for us to wait for the election to be over and see if the government that will take over power will come out with a better policy that will drive the productive sector and resuscitate the economy, but I don’t think the government in power has the personnel capacity to do that.

 

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