Commercial Papers (CPs) have become a necessity for corporations in Nigeria when they experience scarcity of affordable working capital. In recent times, businesses are observed to favour CPs as a reliable source of short-term funding.
Commercial paper is a type of short-term debt instrument issued by corporations and financial institutions. It is used to raise funds for working capital, and other short-term needs, and is generally considered to be a low-risk investment. Due to its short maturity and high credit quality, commercial paper is considered a safe and liquid investment option for businesses and investors alike.
Commercial paper has been used as a source of short-term funding for businesses for over a century. The first was issued in the 1880s by large corporations. Initially, it was sold only to a select group of large investors, such as banks and insurance companies. But, as the market grew, it became more widely available to a wider range of investors. Today, commercial paper is a major source of short-term funding for businesses and is widely traded in the financial markets.
For example, a big company, like an electronics store, needs some money to buy more electronics products to sell in their store. But they do not want to borrow the money for a long time, they just need it for a little while. So, instead of going to a bank to borrow money, they can make something called ‘commercial paper’. It is like a big cheque, but instead of being written by a person, it is written by the electronics store.
They give the commercial paper to people who have money, like you, and say we promise to give you your money back after a short amount of time, like say three months.
The people who have money can decide if they want to give the electronics store the money by buying the commercial paper or not.. And just like a cheque, the electronics store can use the money they get from the commercial paper to buy more electronics products for their store.
In Nigeria, the maturity period of commercial paper is between a minimum of 15 days to 270 days maximum. The debt is usually issued at a discount that reflects market interest rates. They are issued by credit worthy companies to meet their short-term obligations. Being short term debt securities, they are regularly traded on the money markets as money market instruments.
FMDQ Securities Exchange Limited provides access to capital for corporate Institutions through its efficient and proficient Securities Admission Franchise.
According to data from the FMDQ Group, 56 Nigerian companies raised N1.504 trillion through commercial papers in 2023, representing a whopping 499 per cent increase from the N251 billion raised in 2022.
The top 10 CP issuers were; MTN Nigeria Communications Plc, Flour Mills of Nigeria Plc, GZ Industries Limited, Dufil Prima Foods Plc, C&I Leasing Plc, Saroafrica Funding SPV Plc, Cardinalstone Partners Limited, Coleman Technical Industries Limited, FSDH Merchant Bank Limited and FBNQuest Merchant Bank.
Speaking on this, the vice president, Highcap securities Limited, Mr. David Adnori attributed the surge to the low yield environment in the treasury bills market, which enabled companies to access the market to raise funds through commercial papers.
He said, with lending rates soaring at an unprecedented level, companies in the country have been exploring creative ways to mobilise funds at affordable rates.
There are advantages and disadvantages of approaching the CPs market to raise funds.
Pros of Commercial Paper
Low-risk: It is typically issued by financially stable companies with a strong credit rating, making it a low-risk investment option.
Short-term maturity: It typically has a maturity of less than 270 days, which can be an advantage for investors who want to invest for a short period of time.
High liquidity: It can be bought and sold in the secondary market, making it a liquid investment option.
Cons Of Commercial Paper
Unsecured: It is not backed by any collateral, which can make it a high-risk investment than a security with collateral.
Limited returns: The returns on commercial paper are generally lower than those on other investments, such as bonds or stocks.
Credit risk: The creditworthiness of the issuer is important for commercial paper, as it is an unsecured debt, so if the issuing company experiences financial difficulties, the investors may not get their funds back.
Tips
Aside floating commercial paper to fund your business, you can as well earn interest from your investment as an investor within a short time. Either way you want to play in the market, it’s a win-win situation.
