DATA from Financial Markets Dealers Quote (FMDQ) has shown that short-term Commercial Papers (CP) issuances surpassed bond issuances, indicating increased interest of companies and individuals towards CPs to mitigate the current high cost of borrowing amidst economic uncertainty.
Analysts from Proshare Research said the Nigerian Central Bank’s hawkish monetary policy has given corporate organisations no choice but to use debt instruments to meet short and long-term obligations as lending rates spiked over the first half (H1) 2022.
With the recent 150 basis points (bps) hike in Monetary Policy Rate (MPR) to 15.50 per cent and the review of the cash reserve ratio (CRR) to 32.5 per cent for banks, borrowing from banks to finance short-term obligations would become more difficult for companies and encourage the issuance of more Commercial Papers and bonds in the second half of 2022.
According to the analysts, the Bond and Commercial Paper market is beginning to be a playground for corporate organisations to raise capital to meet their short and long-term obligations.
The diversion to the instruments picked up in 2020 with the low-interest rate environment as the CBN adopted the expansionary monetary policy to improve liquidity and combat the COVID-19 pandemic.
Companies could issue debt securities at interest rates higher than risk-free securities (Treasury bills and FGN Bond) but lower than banks’ lending rates.
The multiple issuances during the period showed firms’ deviation from the traditional means of raising capital through the public offering of their shares to a debt acquisition strategy.
Data from FMDQ shows that over N4 trillion was raised through CPs in 2021. Large and small companies issued the CPs. The large companies included MTN, Dangote Cement, and a few more.
A report suggested that the issuance in 2020 was higher than that of 2021 by 76.8 per cent (Y-o-Y) as the low-interest rate environment during the pandemic encouraged organisations to raise funds at lower rates.
The current high-interest environment and significant government borrowing in 2021 discouraged corporate issuances.
However, in 2022 the narrative has shifted. The year has seen large issuances by big and small companies.
Dangote issued the largest corporate bond in the history of the Nigerian capital market, worth N116 billion, and MTN listed the highest short-term instrument at N127 billion. Contrary to earlier predictions, the CP and bond markets have been attractive in 2022.
The Federal Government’s intention to visit the debt market to fund its financial obligations has, so far, proven successful.
Furthermore, over six companies have issued corporate bonds worth N246.28 billion to improve their balance sheets and scale up operations with over N500 billion, according to Proshare.
Alongside the issuances, the participation from individual and institutional investors has supported the market, being partly responsible for the selloffs in fixed income assets as investors seek higher yields to cushion low inflation-adjusted valuations.
Industry experts say that listing the bonds and CPs on FMDQ and Nigerian Exchange (NGX) has increased participation and liquidity-enhancing secondary market trading.
Also, some private companies have issued bonds in collaboration with a particular state government and private organisations to raise funds.
For example, Alabama Power Limited issued a N4.2 billion seven-year bond which Ondo State serves as the guarantor. Alabama Power Limited is an independent power plant in partnership with the state to supply electricity to the state secretariat.
The bond is supported by an irrevocable standard payment Order (ISPO) from the state’s revenue with a coupon rate similar to the Special Purpose Vehicle (SPV) issued by other states.
“The fixed income market will see lively trading over Q4 2022 as the fiscal authorities feel pressured to plug the fiscal deficit by resorting to 91 and 364-day tradable debt instruments.
“The rising Central Bank (CBN) monetary policy rate (MPR) will pressure ways and means of financing, forcing the treasury to take a few steps back. Beyond bills, state and Federal Governments may increasingly resort to revenue bonds to meet capital expenditure as domestic interest rates climb higher,” the Proshare analysts stated.
However, not only would the public sector look towards longer-dated instruments, but the corporate sector would also take a shine to longer-term financing liabilities.
ALSO READ FROM NIGERIAN TRIBUNE
and then