Frequently Asked Questions (FAQs) on Commercial Papers

What are Commercial Papers?
Commercial Papers (“CPs”) are unsecured short-term debt instruments issued by corporates to get funds from the public (private individuals, institutional investors, non-governmental organisations, religious bodies etc.) to meet short-term debt obligations such as working capital needs.

How do Commercial Papers work?
CPs are similar to Treasury bills (“T-Bills”) because they are issued at discount rates, which may be paid upfront or capitalized.
For instance, an investor could choose to receive N1m in the future (maturity amount/face value), which would require an ‘upfront’ investment below that face value (for instance N980,000 for a 90-day instrument at 8.0%), or could choose to invest N1m today to receive a ‘capitalized’ return above the investment amount (for instance N1.02m for a 90-day instrument at 8.0%).

What is a True Yield?
The ‘true yield’ is the effective return on investment (ROI). Using a simplified example, if an investor wants to receive N100,000 after a one-year period (365-days) and chooses to invest in a discounted instrument which is offered at a rate of 10%, the investor will pay a discounted value of N90,000 to receive N100,000 at maturity.

The true yield on that investment is not 10.0%. It is in fact 11.1%, calculated as return received as against the initial investment (N10,000/N90,000). This represents the return to the investor if the instrument is held to maturity.

The discount rate is used to calculate the present value of an investment, which differs from the yield on an investment.

Primary and Secondary Market for Commercial Papers
A CP can be purchased either in a primary or secondary market. The primary market is where investors buy financial instruments at issuance, while in the secondary market, investors trade (i.e. buy and sell) instruments purchased at primary market issuances.

The minimum purchase amount in the primary market may vary depending on the issue size. However, the minimum limit is typically set at N5m, while in the secondary market there are no standard lot sizes, but a minimum of N100m should be prepared for any purchase.

The major limitation for the secondary market trading of commercial papers is the illiquidity within the market, given that purchasers of these instruments typically only sell instruments in large volume sizes. Consequently, purchasing CPs is easier in the primary market.

What is the Tenor?
CPs are issued for time periods which match the issuer’s needs, with minimum and maximum tenors of 15 days and 270 days respectively.

What is a Commercial Paper Auction?
In the primary market, the issuer through an Issuing House sells to the market, through a fixed price subscription. Here, market participants signal interest in the issue and commit to purchasing volume sizes over an ‘offer period’ – which typically lasts only a few days.

This process is so because the rate on the issuance is fixed prior to offer to the market. This is unlike the T-Bills primary market issuances which are held in an auction format and investors are allowed to state the yields at which they would be willing to invest.

What do I Benefit from Investing in Commercial Papers?
While CPs in Nigeria are typically issued by blue-chip corporates with impressive track records of financial performance, this does not eliminate credit risk.

The discount rate on the CP is usually reflective of the credit rating of the issuer, which may be gleaned from the magnitude of the difference between the discount rate on a T-Bill with similar maturity and the CP being issued.

Consequently, CPs offer investors the opportunity to purchase better yielding instruments than available on risk-free instruments, if they are willing to take the calculated risk.

How are Commercial Papers different from Treasury Bills?
CPs have similar characteristics to T-Bills, relating to the mode of pricing. However, that is where the similarities end. T-Bills are usually issued by the government through the CBN at auctions which are typically held fortnightly, for fixed tenors of 91-days, 182-days, and 364-days.

Also, the minimum volume to participate in the T-Bills primary market auctions is N50,001,000.0, while secondary markets are very active and flexible relative to lot sizes.

Can I sell before Maturity?
Yes, you can sell CPs before maturity. A major constraint of selling CPs, however, is illiquidity and size of the minimum tradeable volume. Also, the price at which you sell depends on the prevailing interest rate at the time.

Can I rollover my CP Investment?
Usually, the answer is no. This is because a CP issuance is not a periodic auction which provides certainty of another CP investment opportunity. This, however, does not rule out the possibility of a CP investment opportunity at maturity. Nevertheless, when a CP investment matures, it can be rolled over into another money market or fixed income investment such as T-Bills and Bonds.

What are the Other Benefits of Commercial Paper?
• Interest earned is tax-exempt
• Since certificates are issued for CP investments, they can be used as collateral or as evidence of investment for visa application.

How Can I Buy Commercial Papers?
To purchase Commercial Papers, you can contact your account officer or send an email to brokerageteam@afrinvest.com
Lagos: Adedoyin: +234 809 778 3100
Port Harcourt: Taiwo: +234 808 718 4771
Abuja: Bola: +234 909 504 1827

Investment Opportunities in Commercial Papers :

You can read more from this link below;

https://www.proshareng.com/news/%20BONDS%20&%20FIXED%20INCOME/Investment-Opportunities-in-Commercial-Papers/41448

DANGCEM Proposed Issuance of 950 Billion Series 3 and 4 Commercial Paper

Dangote Cement PLC (DANGCEM-NL), Africa’s largest cement producer, announces the proposed issuance of N50billion Series 3 and 4 Notes under its N150billion Commercial Paper Programme, announced on 27th June 2018.

Funds raised in the Commercial Paper (CP) Programme will be used for capital expenditure, working capital and general corporate purposes.

https://www.proshareng.com/news/%20BONDS%20&%20FIXED%20INCOME/DANGCEM-Proposed-Issuance-of-950-Billion-Series-3-and-4-Commercial-Paper/41397

CBN intensifies financial literacy, consumer protection campaign

The Central Bank of Nigeria (CBN) has continued to intensify its campaign aimed at creating a knowledgeable customer base for financial institutions.

The move was to engender seamless banking services.

To this end, the central bank recently organised the CBN Fair, a two-day event where the general public were educated on the various programmes and policies of the CBN and how they could key in and enjoy the derivable benefits.

The sensitisation campaign packaged by the corporate affairs department of the CBN centred around initiatives that most people knew little or nothing about. They included real sector financing, payment systems, consumer rights and responsibilities, bank verification number (BVN), financial inclusion, agricultural financing, as well as micro. small and medium enterprises financing.

The CBN Director of Corporate Communications, Mr. Isaac Okoroafor, said the Bank was desirous of creating appropriate and people-centred policies to spur economic growth in Nigeria.

“We (CBN) have done enough and we will continue to do more to enhance the economy of the nation,” he said, adding that the fair with the theme ‘Promoting Financial Stability and Economic Development,’ was in tandem with the mandate of the apex financial institution.

Okoroafor, who was represented by the CBN team leader at the fair, Mr. Sam Okogbuo, Assistant Director, Public Communications, said giving people knowledge was akin to making them rich.

“If you have knowledge you have wealth,” he said, noting that by explaining its programmes and services people would gain the needed knowledge to grow rich and escape from poverty.”

The CBN spokesman pointed out that the policies and programmes rolled out by the apex bank were already having positive effects on the economy, citing the rise in agricultural productions.

According to him, the initiative of identifying 41 products for local production backed up with appropriate incentives such as the Anchor Borrowers programme has led to exponential growth in rice production.

He urged Nigerians to embrace banking, saying it not only enables one to imbibe the culture of saving, but also makes it easier for accounts holders to access loans from commercial and specialised banks. CBN officials were on hand to explain the various aspects of the apex bank’s programmes and policies and their implications for economic growth.

The senior manager, Currency Operations, Ngozi Eze, who spoke on the clean note policy of CBN, said the naira represents the nation’s symbol and pride hence Nigerians must cultivate the attitude of not abusing the currency notes.

She warned people against spraying naira at ceremonies and trampling on the currency notes, saying that such practice constituted a serious offence which attracts N50,000 fine or six months imprisonment or both on conviction by court.

Eze, made members of the public to understand that counterfeiting of the naira amounted to economic sabotage, saying that the CBN “is mad at people counterfeiting naira.”

However, the senior manager currency operations assured that CBN was always on the alert to checkmate currency forgers, adding that the apex bank has built in security features in the naira to prevent counterfeiting.

Also, the Senior Manager Payment System, Mr. Nnanna Chukwu, urged people to embrace the cashless policy of the CBN, noting that alternative banking channels have made money transfer and payments for goods and services easy. He disabused the minds of the people on their fears and misgivings about the cashless regime, saying it remains a safe means of business transactions.

https://www.businessfinanceinfo.com/cbn-intensifies-financial-literacy-consumer-protection-campaign/

Investment Opportunities in Commercial Papers

FSDH Research identifies investment opportunities in Commercial Papers (CPs). CPs are unsecured money market instruments issued in the form of promissory notes to raise shortterm funds, which companies use to finance their operations. They are issued by large corporations with good credit ratings. CPs are issued in tenors ranging between a minimum of 15 days and a maximum of 270 days.

FSDH Research has observed a number of companies recently issuing CPs in the market. The drop in the yields on Nigerian Treasury Bills (NTBs) will also drive the CP issuance. In addition, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is encouraging large corporations to issue CPs. The yields on CPs are usually higher than those on NTBs. FSDH Research notes, however, that the risks inherent in investing in CPs are higher than the risks inherent in investing in NTBs.

The yields on the NTBs have dropped consistently over the last few months. The average yield on the 364-Day NTB dropped to 12.99% in July 2018, compared with 22.80% in July 2017. The Securities and Exchange Commission (SEC) regulates the CP market in Nigeria and protects investors’ interests to ensure an organised market. Usually, the offer for subscription of CPs opens for a short period of time – in most cases, one week.

The issuing company determines the minimum subscription, which is usually N5million, but may be lower. The CPs are typically issued at a discount to the face value. This means that an investor will pay less than the amount on the face of the investment note and will earn the full value at maturity.

The interest on the investment is the difference between the face value and the discounted amount the investor paid at the time of investment. Investment banks or investment management companies regularly introduce available CPs into the market to their clients when the offer is open for subscription. CPs are relatively low-risk investments because of their short maturity period.

The FMDQ OTC Securities Exchange provides a platform for trading in CPs in Nigeria. Thus, CPs investments are relatively liquid as they can be traded in the secondary market if investors wish to sell before maturity.

First Quarter Economic Report By CBN ;

With commercial papers, companies can access funding at relatively cheaper rates –FBNQuest

In this interview, Oluseun Olatidoye, Head Debt Capital Markets at FBNQuest Merchant Bank, spoke 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 institution stake advantage of this investment option.

1. 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 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 byas much as2% 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.



2. 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.



3. 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 isacting 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.



4. 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), WemaBank Plc,Mixta Real Estate Plc., UACNProperty 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.



5. 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 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.



6. 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.



7. 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 precedingthree 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.



8. 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

9. 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.

Good job, Deknight45!

MTN Nigeria to raise N100 billion through commercial paper
Telco giant, MTN Nigeria is seeking to raise a N100 billion through Commercial Paper (CP). The EFG Hermes Frontier Research Head, Kato Mukuru disclosed this during an interview with CNBC.

Although it was not yet officially announced, but during the interview, Mukuru said he was talking to some staff members of the CNBC News, who mentioned to him that MTN was to issue a N100 billion commercial paper.
Possible reason: Mukuru made known that the telco might have resorted to raise the commercial paper because “it tells you that either it is cheaper than getting bank finances or the banks don’t want to finance it.”

The EFG Research Head added that there was something wrong for MTN to have wanted to raise the fund through the CP saying this type of borrowing should ordinarily be secured from the bank.

Understanding what CP entails: A Commercial Paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts payable and inventories and meeting short-term liabilities. Maturities on commercial paper rarely range longer than 270 days. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, making it a form of unsecured debt. As a result, only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. Because commercial paper is issued by large institutions, the denominations of the commercial paper offerings are substantial, usually $100,000 or more. Other corporations, financial institutions, wealthy individuals, and money market funds are usually buyers of commercial paper.

https://nairametrics.com/2019/09/16/mtn-nigeria-to-raise-n100-billion-through-commercial-paper/

Commercial paper issuance enthrones regime of cheap funding

Mr. Oluseun Olatidoye is the Head of Debt Capital Markets at FBNQuest Merchant Bank. In this interview with Assistant Editor, Finance/Economy, CHIJIOKE NELSON, he spoke on the importance of assessed increase in commercial papers’ issuance at the capital market, the economic benefits and the bank’s capacity to help both individuals and institutions take advantage of the investment opportunities.
What would you make of CBN’s decision to patronise commercial papers issued by companies?
First, 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 Monetary Policy Committee meetings, the Central Bank of Nigeria (CBN) said it was ready to lend to large corporates in the country by buying commercial papers issued they issue. I think the decision was based on the fact that companies will be able to lower their borrowing cost by as much as two per cent to four per cent with commercial papers, which aligns with its target to help reduce the borrowing costs for corporates and manufacturing organisations to single digits.

To what extent would this 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 FMCG companies and 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.

Has FBNQuest Merchant Bank any role to play in commercial paper issuance?
We actually assist in two different ways. For the companies interested in issuing commercial papers, we take them through the rigours 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 that 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 records do you have with regards to commercial papers?
FBNQuest has undertaken deals for Dangote Cement Plc, Nigerian Breweries Plc, Lafarge Africa Plc, Flour Mills of Nigeria Plc (FMN), Wema Bank Plc, Mixta Real Estate Plc, UACN Property Development Company Plc (UPDC), and others, currently ongoing. We coordinate the structuring of these transactions and manage other activities from approvals to roadshows and their launch. 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, among others.

How has the capital market responded to the development?
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 more than N40 billion in the last three years.

What are you doing now to reach out to investors on this opportunity?
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 handhold our clients on this investment opportunity to help them achieve their goals.