By Babajide Komolafe
Comercio Partners Limited, an investment banking firm has advised investors on the need to understand and mitigate the risks of investing in Commercial Papers, CPs.
The company’s advice is coming on the heels of the huge growth in the volume and value of CPs programme registered on the FMDQ platform.
According to FMDQ the volume and value of registered CPs programme rose 41 per cent and 18 per cent, year-on-year, YoY, to 58 and N3.57 trillion as at March 2nd, 2022 from 41 and N3.02trn at the end of 2020.
Speaking in an interview with Vanguard, Nnamdi, Nwizu, Co-Founding Partner, Comercio Partners, attributed this trend to the low interest rate environment and the dearth in secondary market treasury (Open Market Operations, OMO bills) issuance to about N120 billion monthly from N1t trillion.
“Both factors have led to a switch by investors to Commercial Papers. The high demand for them has naturally led to an increase in the number of issuers entering the market, as they now see it as a simpler and less expensive way to raise funds,” he said.
On the risks of investing in CPs, Nnamdi advised that investors must understand that they are investing in unsecured papers and hence ensure they do due diligence on any companies issuing CPs.
He said: “Concerning risk, investors must understand that they are investing in unsecured papers. This means that there is no collateral for most Commercial Papers and if they go bad, then they must start court proceedings against the company, to find a way to seize assets and get funds back. Best mitigation is due diligence.
“Ensure you do your due diligence on the firm issuing the Commercial Paper as they are responsible for the repayment of your funds. Check how healthy they are, look at their balance sheet, profitability, Management and Board. All of these are key with regards to the ability and willingness to repay funds taken.”
Disclaimer
Comments expressed here do not reflect the opinions of Vanguard newspapers or any employee thereof.