The financial year 2023 in Nigeria witnessed a dramatic shift in corporate financing strategies, notably marked by an extraordinary surge in the utilization of commercial papers (CPs) by various entities seeking capital.
Data released by the FMDQ Group revealed an astonishing 499% increase in CP issuances compared to the preceding year, reaching a monumental N1.504 trillion.
This unprecedented escalation showcases a paradigm shift in fundraising methodologies amid a challenging financial environment characterized by soaring bank lending rates.
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At the forefront of this CP issuance trend were industry giants like MTN Nigeria Plc and Dangote Cement, who raised substantial amounts to meet their financial requisites. MTN Nigeria Plc led the pack, securing a staggering N375 billion across seven issuances as part of its N250 billion CP issuance program. Not far behind, Dangote Cement successfully raised N221.28 billion through six issuances within its N300 billion CP program. Flour Mills of Nigeria Plc and Nigerian Breweries Plc also made significant contributions, raising N150.97 billion and N116.49 billion, respectively, through their CP issuance programs.
Joining these heavyweights, several other prominent entities bolstered the surge in CP issuances. Sterling Bank, Dufil Prima Foods Plc, FSDH Merchant Bank, Julius Berger Nigeria, FBNQuest Merchant Bank, and Mixta Real Estate collectively added substantial amounts to the impressive CP issuance figures witnessed in 2023.
Despite the remarkable dominance of CPs as the preferred debt instrument, corporate bonds also played a role in capital acquisition, albeit experiencing a notable decline of 83.8% in comparison to the previous year. Noteworthy issuers included Aradel Holdings, Lagos Free Zone Company, FCMB Group, and Flour Mills of Nigeria, among others, per NairaMetrics.
The rationale behind this seismic shift towards CPs primarily stems from the punitive lending environment prevailing in the banking sector. Bank lending rates soared to staggering heights, touching 30%, against the backdrop of a monetary policy rate pegged at 18.75%. Faced with this onerous lending scenario, companies pivoted towards debt instruments like CPs, which offered more favorable terms and security.
CPs, renowned for their competitive interest rates compared to traditional bank loans, emerged as an attractive avenue for both borrowers and investors. For instance, CPs issued by MTN Nigeria boasted interest rates ranging from 10.41% to 14.33%, significantly lower than the exorbitant lending rates witnessed in the banking sector.
The allure of CPs, characterized by their ability to provide capital at lower borrowing costs compared to bank loans, motivated companies to embrace these instruments, circumventing the challenges posed by prohibitively high lending rates.
This strategic pivot in capital sourcing signifies the evolving dynamics in Nigeria’s corporate finance sector, accentuating the growing prominence of debt instruments like CPs in meeting the financial needs of businesses amidst stringent lending conditions.