•Analysts blame FG borrowings, see bleak future

By Nkiruka Nnorom

Corporate borrowings through the Commercial Papers (CPs) market fell sharply by 76.8 per cent,  Year-on-Year (YoY) to N375.38  billion in 2021 from N663.73 billion  in 2020, triggred by the spike in interest rate.

CPs are short term  debt instrument, less than one year,  issued by companies to borrrow from the investing public as alternative to bank loans which comes with hight interest rates. 

Recall that interest rate on one-year Nigerian Treasury Bills (NTB) issued by te Federal Government had fallen to 1.22 per cent as at December 31, 2020 following the expansionary monetary policy measure adopted by the Central Bank of Nigeria (CBN)  to inject liquidity into the economy in the face of  the Covid-19 pandemic that ravaged economies.

However,  in 2021, interest rate resumed an uptrend, reaching 5.12 per cent, more than 300% increase over the 2020 figure, as the economy normalises.

But the Federal Government swooped on the market to raise over N3 trillion in the local market in 2021 and this event crowded out most corporate issuers from the debt market.

Data obtained by Financial Vanguard from FMDQ Securities Exchange Limited also showed a decline in the number of CP issuances, to 50 in 2021 from 67 in the previous year.

Meanwhile, financial analysts have said  that the CP market may remain unattractive to corporate issuers this year owing to the ambitious borrowing plan of the FG.  

According to them the borrowing plan, meant to fund the budget deficit, is expected to keep rates elevated this year.

The Chief Executive Officer of EFG Hermes Nigeria, a Lagos based investment house, Lilian Olubi, stated: “Any resurgence seen in CPs issuance is likely to be minimal. While investors may welcome issuers with good ratings and attractive pricing, it is important to note that the current budget deficit in the market is close to N10 trillion, and will be partly funded through the local market.

“We have seen some issuers in the market this year already but if interest rates head north as anticipated in the coming quarters, it may prove to be a deterrent to issuers as investors seek higher yields”.

Key CP issuances in 2021

During the year, MTN Communication Nigeria Plc raised N73.15 billion,  the highest single CP issuance in 2021, followed by Union Bank of Nigeria (UBN)   Plc’s N69.9 billion and Dangote Cement Plc’s N50 billion CP issuances.

Others are: Coronation Merchant Bank (N29.85bn), Stanbic IBTC Bank (N25.32bn), Nigerian Breweries (N25bn), Dufil Prima Foods (N20.4bn), United Capital (N20.3bn) and Total Nigeria Plc (N15bn) among others.  

Operators’ comment  

Giving further insight into the CP environment since 2020, Olubi stated: “Year 2020 had its peculiarity considering the global economic downturn and ensuing accommodative measures that were adopted to help stabilize the economy and bail out ailing industries. One of the methods adopted by the policy makers was to push liquidity into the system which reduced interest rates drastically in the year. One-year papers closed the year around 1.5% and the lower rate was an incentive for both corporate issuers and investors to embrace the commercial paper market.

“However, things took a turn in 2021 when monetary policy makers became more optimistic in their approach and we saw the one-year treasury instrument rise to 10%. This became an easy incentive for investors to switch back to the treasury bills market.”

Speaking in the same vein, David Adonri, Vice Chairman, Highcap Securities, said: “Issuance of CPs in 2020 was high because interest rate fell drastically to lower single digit. Cost of borrowing via CPs was to the benefit of corporate borrowers more than traditional bank credit in 2020. “There was also incentive for investors to invest in CPs in 2020 due to their higher rates than deposit rate and Treasury Bill rate.  

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She said that most corporates relied on the banks for bridge funding in 2021 as evidenced in the growth in banks loan books.  

“However, interest rates started rising in the economy in 2021. As a result, investors became more attracted to the public debt market. The rising interest rate discouraged corporate borrowers from issuing CPs in 2021 in order not to escalate their finance cost. The rising interest rate environment in 2021 therefore, crowded corporate borrowers out of the debt market, causing issuance of CPs to under-perform the previous year.”

He stated that corporate issuers exploited other available options like their retained earnings, bank credit and supplier credit to enhance their working capital positions.

Emmanuel Onoja, Head of Research, GTI Group, said: “In late 2019, CBN excluded non-bank participants from the OMO window bringing about excess liquidity from maturing OMO bills, thereby pushing rates downwards before the CBN reduced interest rates 2020, reducing the risk-free rate. This made it attractive for corporates to access the debt market at a time when corporate revenues were down due to the Covid-19 lockdown restrictions. These conditions created a vibrant market for CP.” He stated that the decline seen in 2021 signaled a gradual return to normalcy.

  2022 Outlook  

Adonri of Highcap Securities, said with the inflation rate, which appears to be rising again, combined with the ambitious borrowing programme of federal government, interest rates in the economy may start rising in 2022.

“If this happens, the incentive for issuance of CPs will disappear. Consequently, the outlook for the CP market in 2022 is not likely to be brighter than in 2021. Possibility of decline can not even be ruled out,” he added.  

Onoja of GTI Group said: “The key determinant to the debt capital raising activities of Nigerian corporates remains prevailing yields, and Interest rates (risk-free rates) are likely to rise this year due to both internal (growing economic risk) and external factors i.e. the Fed rate increase.

“These events are likely to slow down the level of CP issuances this year as corporates will be looking to manage their debts in the current market climate.”

Vanguard News Nigeria


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