Introduction
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. According to reports, Nigerian corporations raised the sum of N4.29 trillion through CP issuance in the years 2018 to 20201
Today's newsletter highlights the procedure for issuance of CPs in Nigeria as well as the benefits of raising capital through CPs.
What is a Commercial Paper?
A Commercial Paper ("CP") is an unsecured short-term debt instrument (in the form of a promissory note) used by corporate entities to meet their working capital requirements and pay off short-term debts. Put simply, it is an unconditional promise by the issuer to pay to the order of an investor, a certain sum at a future date.
What are the Features of CPs?
1. Parties- the major parties to a CP issuance include:
- Issuers: issuers are companies seeking to raise capital through CPs;
- Issuing and Placing Agents ("IPA"): IPAs are institutions engaged to sponsor the registration and quotation of a CP on a securities exchange platform. The IPA is usually required to be a licensed member of the securities exchange platform;
- Collecting and Paying Agents ("CPA") : CPAs are deposit money banks appointed by the issuer to collect and pay funds to the CP investors as at when required. Deposit money banks that are licensed members of a securities exchange platform may double as IPAs and CPAs. The Guidelines (as defined below), however, provides that only Deposit Money Banks and Discount Houses can act as Issuing and Paying Agents for CPs issued by or to which Deposit Money Banks and Discount Houses serve as a party to the issue;
- Credit Rating Agency: the issuer of a CP is required to be assessed by a rating agency registered in Nigeria or a reputable international rating agency. The credit rating agency will assess the issuer based on its creditworthiness, financial strengths, prospects, history and generally, its ability to meet its debt obligations. Issuers are usually required to have and maintain a minimum investment grade credit of BBB- or similar rating; and
- Guarantor: CPs can be guaranteed (Guaranteed CPs) or unguaranteed (clean CPs). Banks, credit guarantee agencies, development finance institutions, etc are eligible to stand as guarantors to an issuer
2.Tenor– the tenor or maturity period for CPs ranges from a minimum of 15 days to a maximum of 270 days from the date of issue of the CP.
3. Investors– CPs may generally be issued to and held by individuals (resident and non-resident Nigerians), deposit money banks, Nigerian corporate or unincorporated entities and Foreign Institutional Investors.
4.Registration: All CPs are to be registered with a licensed security depository in Nigeria.
What are the Regulations Governing the Issuance of Commercial Papers in Nigeria?
1. The Central Bank of Nigeria's (CBN) Guidelines on the Issuance and Treatment of Bank Acceptances and Commercial Papers, 2019 ("Guidelines") – the Guidelines regulate the issuance of CPs by Deposit Money Banks and Discount Houses as well as the treatment of CPs by financial institutions. This covers instances where Deposit Money Banks and Discount Houses act as guarantors or Issuing and Payment Agents to a CP issue.
2. FMDQ's Commercial Paper Registration and Quotation Rules, 2019 (the "Rules")- the FMDQ Securities Exchange Limited is a securities exchange company licensed by the Securities and Exchange Commission to register and quote CPs on its platform. The Rules govern CPs that are registered and quoted by FMDQ.
The CBN in a circular dated July 12, 2016 ("Circular") to all deposit money banks and discount houses, instructed banks to only deal in CPs registered on authorized securities exchanges. Accordingly, financial institutions are prohibited from acting as issuers, guarantors, IPAs for unregistered CPs. The CBN through the Circular stated that the Rules are approved and cleared FMDQ for the quotation of CPs in Nigeria.
Why Commercial Papers?
Over the years, companies have chosen to raise capital by issuing CPs because it is considered as a quicker and more cost-effective method of raising large sums of money. CPs are also unsecured and therefore do not require the company to have any collateral and will not create any charge on the assets of the Company. It is, however, important to note that the issuer of a CP will require an investment grade from a rating agency to encourage investors to buy the security.
Investors also choose to invest in CPs because they provide good returns within a short period of time. Investors who are unable to commit funds for a long period of time are usually able to buy CPs at a discounted price and gain returns in less than 270 days.
Conclusion
While CPs have been established as a cheaper and more convenient tool for short-term corporate financing, not all companies, especially MSMEs can benefit from this instrument as the CBN and FMDQ have set the minimum size of a CP issue at N100 million. In addition, MSMEs tend to score below average ratings/ assessments by credit ratings agencies as they lack the required criteria for approved credit ratings. These factors make CPs an unlikely mode of securing capital choice for MSMEs in Nigeria.
Footnote
1 https://punchng.com/nigerian-firms-raise-n4-29tn-via-commercial-papers-in-three-years/
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
