Of late, there’s been a renewed interest in the Nigerian debt market. The likes of Flour Mill of Nigeria and Nigeria Breweries have lately sought to raise a cumulative sum of N65 billion via commercial papers (CPs) – an unsecured promissory note with a fixed maturity of not more than 270 days – and issuance of bonds in a bid to take advantage of the liquidity glut particularly as maturities of debt securities are expected to peak in this month.
This interest can be ascribed to the unorthodox policy measures of the Central Bank of Nigeria (CBN) which have distorted the market. The exclusion of non-bank corporates and individuals from the primary and secondary OMO market – a market where short term government debt is sold by the CBN – has seen yields priced lower in the fixed income market, making it cheaper for government and companies to borrow. Also, coupled with the underperformance of the Nigerian stock market, the appetite of local investors in search of investable assets offering higher yields, including corporate debt securities, has increased.
Six years ago, the Commercial paper (CP) market was almost non-existent. It took the intervention of FMDQ – a private securities exchange – in response to favourable regulations of the CBN to revive the market. Since then, the value of CPs listed on FMDQ had grown to N1 trillion as at June 2018. This has provided issuers an alternative to raising capital via debt and given investors access to one more portfolio investment diversification option.
The surge in the CP market holds some critical lessons. It does not only demonstrate how innovation, a response to low yields and uncertainty, happens in financial markets but also how the adoption of technology to drive transparency, governance, integrity and efficiency has spurred the development of other debt capital market instruments as in the case of FMDQ.
To spur economic growth and development, regulators (both fiscal and monetary) must understand that their primary objective is to put in place market-friendly regulations, get out of the way and leave the private sector to drive growth. Just like the responsibility of a of the FIFA and its referees in football. The governing body sets the rules, gets out of the way but keeps its eyes fixed on the ball, technological trends and innovations. Similarly, regulators of the economy can ensure a free-flowing game that isn’t susceptible to rigging.
Being a money-market security sold to obtain funds to meet short-term debt obligations, the issuance of commercial paper favours larger (blue-chip) companies with good credit ratings. Despite its short tenure the issued CPs will help Flour Mills and Nigerian Breweries reduce considerably their refinancing risk – the possibility that a borrower cannot refinance an existing debt.
Flour Mills, for example, says that proceeds from the commercial paper will be used to refinance existing short-term debts and increase the efficiency of its balance sheet. Nigerian Breweries also stated that the aim is to raise up to N45 billion to support the company’s short-term funding needs.
While this resonates with the objective of the CBN to spur lending to the private sector and stimulate economic growth faster than two percent, it however, leaves smaller companies which account for a larger percentage of the Nigerian private sector with no means of taking advantage of lower borrowing cost in the fixed income space.
Although the CBN’s policy to increase commercial banks’ loan-to-deposit ratio to 65 percent was meant to cater for this challenge, the interest rate environment in Nigeria remains unfavourable for most small businesses, the largest employers of labour across all sectors and account for almost half of goods and services produced in the economy. .
