The market for commercial papers (CPs) has witnessed a steady surge in activity as businesses facing foreign currency (FX) liabilities seek cost-effective funding to bolster working capital and mitigate risks.
This trend persists despite the interest rate hike, with yields on Treasury bills and OMO issuance by the Federal Government climbing to 27%. As of February 2024, firms have issued nearly N220 billion in commercial paper, according to FMDQ Securities Exchange data.
Large corporations utilize commercial papers (CPs), which are money-market instruments, to secure funds for short-term debt obligations like payroll. The issuing bank or firm guarantees repayment of the CP’s face value on the maturity date, typically within 270 days or less.
Despite robust operational performance, many listed firms incurred FX losses, substantially diminishing working capital and prompting CP issuance. This trend was particularly notable in the Fast-Moving Consumer Goods (FMCG) sector.
As one of the most cost-effective means to boost capital, these companies are actively tapping the debt market to issue short-term instruments, facilitating refinancing and future expansion plans. This is owing to the relatively low returns on short-term instruments compared to other investment avenues.
Recently, Flour Mills of Nigeria Plc invited investors to subscribe to its Commercial Paper debt instrument, aiming to augment working capital by N48 billion. Part of a N200 billion commercial paper issuance program, the offering opened on April 4 and will close on April 9. The 180-day and 254-day tenor commercial paper sales in series 7 and 8 to the investing public carry maturity dates of October 7 and December 20, respectively, at rates of 23.5 percent and 25.5 percent. Flour Mills Plc reported an FX loss of N31.48 billion.
Similarly, within its N150 billion CP issuance program, Dangote Sugar Refinery Plc (DSR) floated series 2 and 3 CP offers with a maximum value of N50 billion, closing on April 5, 2024. The business commenced series 1 CP offering for up to N50 billion in February 2024.
Uzum emphasizes that companies experiencing shareholder cash loss are in vulnerable positions and may need to borrow from the market to address balance sheet gaps. Amid uncertainty regarding potential rate hikes, investors often gravitate towards short-term products.
