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Opinions of Tuesday, 21 July 2020

Columnist: Carl Odame

Buoyant commercial paper market in Nigeria; any lessons for Ghanaian companies?

Across all major economic indicators and sectors in West Africa, Nigeria`s economy is far bigger than that of Ghana and this is not debatable. Except that ‘Ghana jollof’ is nicer and tastes better than ‘Nigerian jollof’.

A recent supplement report published by the African Development Bank on the topic African Economic Outlook 2020 amid COVID-19 suggests that Nigeria is facing rapidly weakening macroeconomic conditions, triggered by the sharp decline in price of oil to below $30 a barrel in March 2020, from more than $60 at the start of the year. The pandemic has also had cascading impact through reversed investment flows, volatile financial markets, and disruptions in travel and tourism. Real GDP is even projected to contract by between 4.4% and 7.2% depending on the gravity and duration of the pandemic, wiping out gains from the three consecutive years of growth since the 2016 recession.

From Ghana`s perspective, the research also alluded to the fact that if the outbreak slows by July (baseline), real GDP growth is projected to decline from 6.1% in 2019 to 2.1% in 2020 and 5.6% in 2021. If the pandemic persists until the end of 2020 (worst case), real GDP growth could fall to 1.2% in 2020 and 4.8% in 2021. This somehow presents a damning and gloomy picture on the economy and most corporates. In the midst of all these challenges, there is something Nigeria is doing so well and from my opinion, it is about time Ghanaian companies picked some best practices from Nigeria to meet their funding or working capital needs as COVID 19 continues to put a stress on most corporates in Ghana.

Brief overview of Commercial Papers (CPs)

CPs were first introduced some 100 years ago when New York merchants began to sell their short-term obligations to dealers that acted as middlemen. These dealers would purchase the notes at a discount from their par value and then pass them on to banks or other investors. The borrower would then repay the investor an amount equal to the par value of the note.
Basically, a CP is an unsecured form of promissory note or asset backed that pays a fixed rate of interest. A CP is typically issued by large banks or corporate clients to cover short-term receivables and meet short-term financial obligations, such as funding for a new project, financing of payroll, accounts payable, inventories, and meeting other short-term liabilities. As with any other type of bond or debt instrument, the issuing entity offers the paper assuming that it will be in a position to pay both interest and principal by maturity. It is seldom used as a funding vehicle for longer-term obligations because other alternatives are better suited for that purpose. A CP is regarded as unsecured because it is not backed by any bank guarantee in the event of default. On the other hand, an asset-backed CP is collateralized by other financial asset, making it a secured form of borrowing.

A CP provides a convenient financing method because it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans, and the Securities and Exchange Commission (SEC) does not require securities that trade in the money market to be registered. It is usually offered at a discount with maturities that can range from mostly 15 days to 270 days, although most issues mature in one to six months.

Commercial Papers market in Nigeria.

CPs were introduced in Nigeria in 1962 to finance the export-marketing operations of the then Northern Marketing Board. Under that arrangement, the marketing boards met their cash requirements by drawing ninety-day (90 day) bills of exchange on the marketing boards. The bills were then discounted with the commercial banks participating in the scheme.

Per my recent research, there were Sixteen (16) clients comprising of Five (5) Banks and Ten (10) Corporates that had issued CPs on the Nigeria market either through single issuance or a Programme and value has hit over N1.06trillion ($2.6bn). The net proceeds from each issue are usually used solely to support the Issuer’s short-term funding requirements. The issuance of such papers has helped most big giants to raise the needed funding to expand. One may wonder why the companies would not approach the banks rather than going to the investing public. This is because CPs are much cheaper than commercial bank loans.

According to the Financial Markets Dealer Quotations (FMDQ), the zero-performance witnessed in the market prior to 2014 followed extended period of inactivity, which significantly weakened issuers’ interest and diminished investors’ confidence. The extreme market irregularities which characterised the Nigerian CP market prior to the release of the Central Bank of Nigeria (CBN) guidelines on the Issuance and Treatment of Bankers’ Acceptances and Commercial Papers in November 2009 saw the sharp decline of the then market from trillions of Naira worth to zero level by 2013. However, key initiatives and strategies adopted in collaboration with the CBN have reinvigorated the market, making it attractive for issuers and investors in recent times.

Source: CBN, FMDQ, DMO as at 16th July 2020

Some key regulations governing the Issuance of CPs in Nigeria

By virtue of the Central Bank of Nigeria (CBN)'s circular to all Deposit Money Banks and Discount Houses on the Mandatory Registration and Listing of Commercial Papers dated 12 July 2016, deposit money banks and discount houses may only deal in CPs that are registered, quoted or intended for quotation on Authorised Securities Exchanges, whether acting in the capacity of an issuer, guarantor or Issuing, Placing, Paying and Collecting Agent (IPCA), Collecting and Paying Agent (CPA), etc. The issuance of registered CPs is presently regulated through the:
a. CBN Guidelines on the Issuance and Treatment of Bankers Acceptances and Commercial Papers dated 18 November 2009 and reissued on 11 September 2019 (CBN Guidelines); and
b. FMDQ Commercial Paper Registrations and Quotation Rules August 2019 (FMDQ Rules).
Accordingly, Issuers who wish to register and quote their CP on the FMDQ must comply with the FMDQ Rules.
It is important to note that other major authorized securities exchanges in Nigeria namely, the Nigerian Stock Exchange and the National Association of Securities Dealers OTC Securities Exchange have over the years published proposed applicable regulations for commercial paper issuance which are NSE Listing Rules and NASD Proposed Rules for Admission of Commercial Papers on NASD OTC Securities Exchange respectively.
Interest rates on CPs
CPs are usually issued at a discount from face value and reflects prevailing market interest rates. On June 2020, MTN Nigeria Communications Plc for example completed a historic Issuance (Series 1 & 2 of N50 billion each) under its N100 billion CP issuance programme at a tenor of 180 days (CP 1) and 270 days (CP 2) with a discount rate of 4.6890% – 4.8797% (CP1) and 5.8500% – 6.000% (CP2). Isn’t this amazing? The low interest rates on CPs continue to motivate blue chip companies to look for cheaper sources of funding compared to the traditional Bank Loans. The table below shows average yields on issued tranches.

Source: CBN, FMDQ, DMO as 16th July 2020

Any lessons for Ghanaian Corporates?
Yes! There are certainly some lessons we can pick from the buoyant CP market in Nigeria. A lot of companies today are looking for cheaper funding to support their operations. The good thing is that Ghana Cocoa Board has set the pace where Cocobod bills are issued to support the purchases cocoa during the crop season. These are normally 91-day and 182-day tenor. All the securities are denominated in the local currency Ghanaian Cedis (GHS). As per report from the Central Securities Depository the outstanding 182day Cocoa bills stood at Ghs7.3bn with a face value of Ghs12.5bn. This presence a good opportunity for corporates to emulate and develop the market.

Most commercial banks are not really lending and have taken a tight credit stance. Though COVID 19 has softened the credit framework of some banks, accessing commercial bank loans continue to be a mirage for some institutions due to high interest rate regime, documentation, covenants and collaterals. Interest rates on banks loans are pegged around Ghana Reference Rate (GRR) plus 5%-10% margin levels. From the foregoing discussion, our big institutions in Ghana need to re-think their funding strategies to remain afloat.

Parties Involved in CP transactions
Though arranging for CP transactions may differ, it may take about 7weeks to close CP deal starting from formal kick-off meetings to Settlement. For clients who want to access the market, the parties involved for a successful close may include the Issuer, Dealers, Transaction Counsel, Issue, Calculating & Paying Agent, Auditors and may be a rating agency. Its is important to mention that, a very strong relationship in the domestic fixed income market is factor to a successful CP Programme.

Pension and Asset Fund Managers, Insurance Companies, Trustees are the key players in the market and typically will constitute 60%-70% of allocations even though they are subject to investment limits. Some of these restrictions according to SEC are 1) A fund managers’ total exposure in CP investments using discretionary funds should not be more than 20% of the total funds under management. This will be applicable to each fund in the case of a Collective Investment Scheme 2). Not more than 10% of the Net Assets Value of funds under management shall be invested in the CP of a single issuer and 3). A fund manager shall not invest in more than 60% of a single issue

Ghanaian companies seeking to diversify their funding options may re-consider the CP market which can provide a solution to the short-term financing needs of such companies. Leverage on what COCOBOD has done to secure funding.
Again, the Securities and Exchange Commission (Ghana) issued a guideline for investing in CPs on 8th July 2012 aimed at supporting the provision of working capital to a broad population of companies enabling them to diversify their sources of short-term borrowings and also provide an additional investment instrument for investors to deepen the financial markets. Issuers should take comfort from these guidelines to access the market.

The CP market in Ghana remains under development. A lot of firms continue to fall on Financial Institutions to raise expensive funding. It is important to highlight that, Corporates who will like to access the CP market must be prepared to ensure few house-keepings to meet the registration and listing requirements. A fund manager in Ghana for instance will not buy CPs from an issuer with overdue loans or defaults as per any report obtained from any credible Credit Referencing Bureau (CRB) in Ghana. So is the case for an issuer who has per its latest audited financial statement (which should not be more than 15 months old) a minimum current ratio of 1:1 and debt/equity ratio of 60:40.

The list can go on and on. However, the point is that CPs have become more rampant in the Nigeria debt capital market and recent reports show that issuers are being oversubscribed at every issuance, thereby raising above the intended amount. This presents a huge opportunity in Ghana to leverage and raise funding.

Credit:,, Securities and Exchange Commission ,Ghana. Lisa Osawese Esamah, Central Securities Depository, Tayo Netufo, Miriam Amoako,
Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works.

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