Companies Leverage Commercial Paper To Raise N583.86bn Working Capital

No fewer than 31 companies have raised N586.86 billion Commercial Paper (CP) in the first six months of the year to boost their respective working capital.

Commercial Paper (CP) is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days.

Nigerian businesses have continued to raise funds to finance their businesses through issuance of Commercial Papers (CPs) championed by FMDQ Securities Exchange Limited. This is as access to capital remains a top priority for corporates, as capital is required to meet short-term debt obligations such as working capital needs, funding expansion aspirations and existing debt obligations.

As at June 30, 2024, 31 companies cutting across several sectors of the economy, have raised and listed a total of N583.86 billion Commercial papers on the floor of the FMDQ Securities Exchange.

Dangote Sugar Refinery raised up to N128.87 billion CP in the period under review. Flour Mills of Nigeria listed N91.16 billion CP, while Dangote Cement issued N65.3 billion CP on FMDQ

Other Companies are Nosak Distilleries, Romco Recycling Company, AB Microfinance Bank, Lagos Free Zone Company, Veritasi Homes & Properties, Dufil Prima Foods, Hillcrest Agro Nigeria, Golden Oil Funding SPV, Coronation Merchant Bank, Fewchore Finance Company, Mecure Industries, Smart Residence, Daraju Industries, Capitalisage Technology, VFD Group, DLM Capital, Fidson Healthcare, Johnvents Industries, African Foundries, Coleman Technical Industries, UACN, Skymark Partners, Trust Bank Holdings, Capitalstage Technology, Fintrak Software Company, FBNQuest Merchant Bank, Eunisell, SKLD Integrated, Robust International Commodities, and Afrinvest (West Africa).

The chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion stated that the issuance of Commercial Papers (CPs) has become the trend in the Nigerian capital market used by companies to finance their operations.

He noted that “when businesses require a cash injection to meet working capital requirements, they turn to commercial papers rather than borrowing from Nigerian commercial banks on a short-term basis. CPs are typically issued at a discount to face value, reflecting the prevailing market interest rates in the country.

As a result, it is cheaper for companies to raise capital through the commercial paper markets than borrowing from commercial banks because bank lending comes with higher interest rates.”

Speaking on the trend, the vice chairman of Highcap Securities, David Adonri, said,, the high-interest rate was pushing companies to seek alternative sources of funding;

He said, “Generally when interest rates are increasing in the bank, a lot of fund users explore other avenues to raise funds at a lower cost. CP is one of those avenues, especially to finance working capital and it therefore means that most of the demands for funds within this period have been short-term.

“The cost of raising money via CPs may have been lower than borrowing directly from the bank. With the interest rate hikes in the economy, the banks may have latched on to that to increase their lending rate. That may have escalated to a point beyond the comfort of the fund users, so they resort to the use of commercial papers.”

Also, the chief executive officer at Cowry Asset Management Limited, Johnson Chukwu noted that “the high-interest rate environment was making companies head to the money market to seek funding. This is also helped by the fact that it is easier to issue commercial papers.

“The second and most important fact is that we are now dealing with a high-interest environment. During this period of high-interest rates, borrowers do not want to borrow long-term debts at such high interest rates.”

The chief executive officer of Wyoming Capital and Partners, Tajudeen Olayinka, said, “since, CP is cheaper than bank loans and overdrafts, it is natural that companies in the real sector of the economy with good credit ratings would find it useful as a short-term funding source, especially when the cost of capital is prohibitive.

“For companies in the financial services sector, their stock in trade is money, and so, will readily make use of the CPs market whenever they have difficulty mobilising deposits from traditional customers. So, this is why you have seen a surge in CP listings in the fixed-income market.”