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High interest rates: Blue chip firms shun bank loans for CPs



High interest rates: Blue chip firms shun bank loans for CPs

– 56 firms raised N1.504trn in 2023


Corporate giants’ appetite for Commercial Papers (CPs) has hit a record high, as more businesses turn to the Debt Capital Market (DCP) for funds amid banks’ rising interest rates, Business Hallmark can report.

Many Nigerian companies, especially blue chips, BH gathered, have been dumping money and capital markets instruments like loans and equity for commercial papers, resulting in a jump in the market volume of CPs traded in 2023.

Latest report by the Financial Markets Dealers Quotation (FMDQ) Group, showed that 56 Nigerian companies raised N1.504 trillion through commercial papers in 2023.

According to FMDQ, this figure represents a whopping 499% increase compared to the N251 billion raised in 2022.

Commercial paper, according to Investopedia, the world’s leading source of financial contents on the web, are unsecured short term debt instruments issued by companies to borrow from the investing public as alternative to bank loans, which comes with hight interest rates.

Like Treasury Bills, they are typically issued at a discount and redeemed at par (face value amount) upon maturity. The maturity of these papers do not last beyond 270 days in the Nigerian financial markets.

CPs are not usually backed by any form of collaterals. However, only corporate entities with strong standing and high quality debt ratings are allowed to issue it.

Checks showed that most commercial paper investors are from the financial sector, consisting of banks and insurance companies, individuals, corporate and incorporated companies and foreign institutional investors.

Based on the analysis of data mined from the FMDQ Exchange, MTN Nigeria Plc. led the pack by raising N375 billion in seven issuances in 2Q23, as part of its N250.00 billion commercial paper issuance program.

Following closely on MTN Nigeria’s heel is Dangote Cement.

As part of its N300.00 billion commercial paper issuance program, Dangote Cement raised N221.28 billion in six issuances

Third on the list is Flour Mills of Nigeria Plc, which raised N150.97 billion through its N200.00 billion commercial paper issuance program in 2023.

Nigerian Breweries (NB) Plc also had a good showing, coming fourth by raising N116.49 billion in the year under review as part of its N100.00 billion commercial paper issuance.

Other companies in the list of top 10 issuers of CPs in 2023 are Sterling Bank N47.86 billion, Dufil Prima Foods Plc N47.19 billion, FSDH Merchant Bank N46.08 billion, Julius Berger Nigeria N30.00 billion, FBNQuest Merchant Bank N29.42 billion and Mixta Real Estate, which raised N28.94 billion.


Some financial experts, who spoke to our correspondent on the huge spike in corporate organisations’ appetite for commercial papers, blamed it on several factors, particularly the low interest rates paid by issuers to investors, compared to the high rates they would have got the same funds from commercial banks.

For instance, while the Central Bank of Nigeria’s Monetary Policy Rate (MPC) currently stands at 18.75%, total interest payable by borrowers most times top 30% by the time commercial banks have added others charges such as processing, management and insurance fees.

The apex bank, it would be recalled, had during its Monetary Policy Committee (MPC) meeting in Abuja on July 25, 2023, raised the interest rate to 18.75 per cent from 18.5 per cent, which it inherited from the era of former governor, Godwin Emefiele.

Justifying the raise, the CBN had argued that the MPC is suspicious there might be an aggressive accretion of inflation.

However, experts maintained that the rate hike is a disincentive to businesses, particularly small ones, arguing that the prevailing interest rate charged by banks had hurt and will continue to harm businesses in the country.

Meanwhile, commercial papers in Nigeria in 2023 reported an average yield of 12 percent as of Friday, December 10, 2021.

For instance, MTN Nigeria’s 266-day commercial paper issued on 29 November 2023 had a yield of 16 percent.

Yields from other blue chips issued CPs are: Flour Mills of Nigeria (two deals at different issue yields of 14 percent and 11.2 percent), Dangote Cement (12.5 percent), Sterling Bank (13.5 percent), Stanbic IBTC Holdings (two deals at different issue yields of12.1 percent and five percent respectively); Dufil Prima Foods (15 percent), as well as Nigerian Breweries Plc (two deals at different issue yields of 14 and 15 percent respectively).

Speaking on the development, experts claimed companies are now opting for CPs because they are largely cheaper to secure than other financial instruments; can be cleared from their balance sheets in a year and because they are not taxable, among several reasons.

In his own submission, the Chief Operating Officer of InvestData Consulting Limited, Ambrose Omordion, said the issuance of CPs has become the new trend in the Nigerian capital market used by companies to finance their operations.

“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.

“In addition, interest on the debt is normally tax-exempt and can be deducted from the company’s tax return, lowering the actual cost of the loan to the company. Thus, commercial papers impact the ability of companies to remain competitive and sustainable”, Omordion stated.

Also speaking, a financial analyst, Wole Adeyeye, explained that most companies see commercial papers as one of the cheapest ways to raise funds.

According to him, yields on short-term instruments are relatively low compared to other instruments.

“Commercial papers typically do not create a lien on the company’s assets, and this creates room for enhanced operational flexibility”, Adeyeye said.

Another analyst, Segun Sodiya, said companies are embracing CP because it is cheaper compared to other instruments and largely risk free.


“Compared to other means of raising capital, commercial paper is probably the cheapest and safest. CPs typically do not create a lien on the company’s assets.

“Raising funds through equity would have been a better option, but most business owners don’t want to over divest, fearing loss of control.

“As you know, issuing stocks would require reducing the ownership proportion of the current shareholders, making original owners to cede some control to new investors.

“Also, they are trying to avoid excessive oversight by regulatory agencies by not going to the capital market to raise funds.

“Many companies have since exited the stock exchange because of this. However, since they need funds, they must get it from somewhere. And commercial papers seem to be the next go to.

“So, it is not a surprise that the commercial paper market is experiencing massive surge in activities as companies sought to address their working capital and financing needs”, Sodiya noted.

However, the Managing Director of Highcap Securities Limited, Mr. David Adonri, argued that big companies are going for commercial papers, not just because the interest rate on CP is low, but because they needed short term fund to meet their daily business operations.

“Not that the interest rate on CP is low, just that these companies need short term fund to meet their daily business obligations.

“Some of these companies might be having a short fall in working capital. Short term fund is to finance working capital to remain in business.

“Some might have short-term opportunities to grow their businesses and decided to take advantage of CP to remain buoyant”, Adonri explained.

BH recalled that between 2018 to 2020, corporate organisations operating in the country raised N4.29trillion through commercial papers.

In the same vein, companies requiring short-term capital raised CPs worth N1.806 trillion in 2021.


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