Nigerian businesses shun IPOs, raise N3.09tr via commercial papers

June 18, 2021

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Rising issuance of Commercial Papers (CPs) in Debt Capital Market (DCM) over regular equities financing has become a source of worry to capital market operators, as stakeholders fear that the trend could worsen the drought of new issues that have bedeviled the equities market since the 2007/2008 global financial crisis.Due to the relatively inactive state of the primary market debt issues, CPs have become the new trend in the primary market space. As of April 2021, there are 46 registered CP programmes on the platform of FMDQ OTC Securities Exchange worth N3.09 trillion in value. 

CPs are short-term debt financing securities (no longer than 270 days in tenor) consisting of unsecured and discounted promissory notes issued by large corporations with good credit ratings, which can be readily traded. 
Operators urged the government to initiate strategic policies that would grow businesses in the country and address challenges of hostile and inconsistent macro-economic policies and regulatory environments impeding the nation’s development.This, according to them, would help tackle the persistent stock market volatility, restore the market to a sustainable rebound, and attract new issues to the nation’s bourse.

Head, FSL Securities, Victor Chiazor, said stock market regulators could attract more issues to the market with incentives such as reduction in transaction cost, the introduction of tax cuts and eliminating bottlenecks around application processes. 
He pointed out that raising funds for project expansion and working capital through CP has become a faster and cheaper way for companies to get funding for their business when compared to the cost of raising such funds through the equities market.Aside from its cost-efficiency, Chiazor said debt financing does not require the company to give up control of the company to investors as prerequisites for issuance.

According to him, the company also does not have to hold periodic meetings of shareholders and seek the vote of shareholders before taking certain actions unlike when they raise capital through the equities market.
Stark opacity and extreme market irregularities, which characterised the Nigerian CP market prior to the necessary release of the Central Bank of Nigeria (CBN) guidelines on the issuance and treatment of bankers’ acceptances and CP (2009) propelled a sharp decline of the then market from trillions worth to zero levels by 2013. 
However, hope was rekindled for businesses looking to tap the debt market for short-term capital and investors looking to diversify their portfolios, as the FMDQ-championed CP market reform since 2014, which was predicated on the back of the CBN Guidelines, has contributed, in no small measure, to the revival of the activities in the CP market.This has provided a renewed opportunity for issuers to grow their businesses and meet short-term funding obligations as well as restoring the much-needed confidence required by investors to actively participate in the market.

Some of the corporates that have turned to CP to raise funds include MTN Nigeria Communications Plc, which recently notified the Nigerian Stock Exchange of its successful issuance of the N100 billion series I & II notes CP programme.
In April, Flour Mills of Nigeria Plc announced the issuance of N30 billion (13 and 14), under its N100 billion CP programme, which was registered with the FMDQ OTC Plc. In the same month, United Capital Plc confirmed that it successfully raised N5.3 billion in a series one and two CP issuance, under its N20 billion programme registered with the FMDQ Securities Exchange.Similarly, in the same period, Nigerian Breweries Plc informed the NSE of the continuation of its CP with the launch of series seven and eight of the programme, which aimed to raise up to a maximum of N48 billion to support the company’s short-term funding needs.

In the last 10 years, most stocks have been priced below their book values in the secondary market. This equally served as a disincentive to issuers, who normally issue stocks at a discount to the market.
Before 2008, the primary market for equities was an important hub of activities, and the persistent offering of new issues kept the tempo of market expansion and capital formation for the economy. The primary market is also where securities are created, while the secondary market is where investors trade those securities.However, in recent times, the equities’ market has been standing on one leg. For instance in 2018, 10 years after the bloom, the value of new equities issued was a paltry N32 billion whereas, the value of shares traded in the secondary market was N1.2 trillion.

According to analysts, the overall weak macroeconomic scenario sustained negative market sentiments in the past few years, coupled with the tense socio-political space, which has not encouraged successful primary market activities.
Since the global financial crisis of 2008 to date, only six companies have approached the market for Initial Public Offering issuance.


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