In this interview, Oluseun Olatidoye, Head Debt Capital Markets at FBNQuest Merchant Bank, spoke to Collins Nweze on the increased activity in the issuance of commercial papers in the Nigerian capital market. He also highlighted some of the economic benefits of more commercial paper issuances, and how FBNQuest Merchant Bank is positioned to help both individuals and institutions take advantage of this investment option.
- The CBN has decided to lend directly to companies through commercial papers, which you provide access to as FBNQuest Merchant Bank. What would you say is the reason for this decision from them?
A commercial paper (CP) is a short-term unsecured promissory note issued by companies. It is basically a document that promises to repay a defined amount of money with interest after an agreed period of time, and can be bought by both individuals and institutional investors.
At the last MPC meeting, the Central Bank of Nigeria (CBN) announced it was ready to lend to large corporates in the country by buying commercial papers issued by such firms. The decision was based on the fact that companies are able to lower their borrowing cost by as much as 2% to 4% by issuing commercial papers, which aligns with the CBN’s target to help reduce the borrowing costs for corporates and manufacturing firms to single digits.
- What is the impact of this? How can the increased use of commercial papers benefit corporates and the economy?
Simply put, commercial papers are an alternative source of funding to businesses. Access to finance is critical to manufacturing and FMCGs companies, other corporates as well as businesses that require short-term or working capital funding. With commercial papers, companies have access to finance at relatively cheaper rates than what they would obtain from other sources, and this is a major advantage for them to drive down costs for sustainable growth.
The economy benefits directly as it is a cheaper source of funds that promotes increased bank lending to the real sector of the economy. Commercial paper issuances enable better-rated corporates meet funding requirements relatively quickly and drive increased profitability, while also stimulating job-led economic growth and sustaining economic recovery.
- What role does FBNQuest Merchant Bank play between the investors and issuers of commercial papers?
We actually assist in two different ways. For the companies interested in issuing commercial papers, we take them through the rigors of meeting the conditions for eligibility by assisting with board approvals, ratings advisory, regulatory engagement, drafting of the transaction documents, coordinating the transaction process, roadshows and then the offer launch.
The second role we perform is acting as the collection and paying agent, and what this means is that we collect the issue proceeds from the investors, remit them to the issuing company and then return investors’ monies to them with agreed interest upon maturity, in line with the FMDQ rules and regulations.
- What are some of the major transactions done by FBNQuest Merchant Bank as regards commercial papers?
FBNQuest has undertaken deals for Dangote Cement Plc, Nigerian Breweries Plc (NB), Lafarge Africa Plc, Flour Mills of Nigeria Plc (FMN), Wema Bank Plc, Mixta Real Estate Plc., UACN Property Development Company Plc. (UPDC), and a host of others currently ongoing.
We coordinate the structuring of these transactions and manage other activities from approvals to roadshows, and the launch of these transactions. We also position ourselves to attract the right investor base interested in these commercial papers on behalf of the issuers. A testament to our capability and quality of our support is evident in the number of clients who re-engage us to assist with subsequent issuances, such as Mixta Real Estate, FMN, UPDC and others.
- How has the capital market responded to the increase in the issuance of commercial papers?
The capital market appears to have rapidly embraced commercial papers as an alternative source of financing for companies, and as a short-term investment option for various categories of individual and institutional investors. We hold the opinion that there is currently an ideal “window of opportunity” for companies to take advantage of commercial papers to raise capital.
Some corporates may not think they can consider the issuance of commercial papers as a source of funding because they do not meet set qualification criteria, one of which requires having an investment grade rating. As experienced transaction advisers, we believe this is not an insurmountable challenge and we have assisted clients in the past to structure a solution which provides a credit enhancement to enable them access the capital markets through Commercial papers. This credit enhancement product is called a Liquidity Support Facility (LSF). On the strength of the LSF for one of our clients, the commercial paper eventually issued was rated A-. The firm succeeded in raising N16billion on their debut issue, and has raised over N40billion in the last 3years.
- How does FBNQuest Merchant Bank reach out to investors to capitalize on commercial papers?
FBNQuest Merchant Bank acts as an intermediary between investors and the issuers. We have a portfolio of major investors which are the banks, Pension Fund Administrators, High Net Worth Individuals and Asset Managers. Once we launch a transaction, we send a notification to these stakeholders and have conversations with them, taking them through the transaction dynamics to see if they are interested in investing.
Our approach to supporting our clients through their investment decisions starts from the proper and transparent process of structuring of the commercial papers, to how we clarify their investment objectives and appetite as a basis for recommending the option. We assist them as trusted advisors by guiding them step-by-step through the investment or issuance process. With our years of experience and expertise, we are able to hand-hold our clients on this investment opportunity to help them achieve their goals.
- What are the pre-requisites for organisations to issue commercial papers?
The corporates must have proper corporate governance. This is because investors would not put their money into a business where there is no board or management structure. The organisation must also be able to show their audited financials for the preceding three years, and they should have an investment grade rating.
As mentioned earlier, we have worked successfully with clients to provide solutions that help them meet the requirement of an investment grade rating and we remain keen to facilitate this for other interested corporates.
- Apart from the CBN’s encouragement of large corporates to issue commercial papers, do you think smaller firms will tap into the opportunity to fund their businesses and increase credit creation?
I think a number of them would consider it, but a vast majority may think it is a tedious process. It is important for these firms to learn about the process and the benefits of this type of financing as one that provides funding at a lower rate. They should speak to a capable adviser to assist them with exploring the opportunity and determining its viability.
The fact is that the process exists to protect both the issuer and the investor, and the benefits could compensate for the perceived tediousness. We have had positive conversations with a number of local corporates on the issuance of commercial papers and we believe the awareness is getting better, which should hopefully translate into issuances in the short to medium term. We will continue to engage the medium and large corporates (both local and international) on the benefits of the products as a tool for funding their working capital needs to facilitate growth.
