Flour Mills of Nigeria Plc. (referred to as “Flour Mills” or “FMN”), Nigeria’s leading food and agro-allied group, announces the issuance of the sum of N1.7 billion (series 6), under its N100 billion Commercial Paper Programme which is registered with the FMDQ OTC Plc. (FMDQ) and completed on February 14, 2019.
All issuances totalling N20.34 billion under the programme are quoted on the FMDQ Exchange.
The management of FMN disclosed that the commercial paper programme will help the Company to focus on its strategic objective of sustaining its market leadership position within the foods and agro-allied space.
Understanding Commercial Paper
The Central Bank of Nigeria (CBN) defines it as “an unconditional promise by a person to pay to the order of another person a certain sum at a future date. Such an instrument may or may not carry the bank’s guarantee.” Where the bank guarantees the CP to make it more marketable in the money market, the instrument is said to have acquired the force of a Banker’s Acceptance and the bank incurs a contingent liability. Where the CP is not secured or guaranteed by the bank (clean CP), it needs not to be reported as a contingent liability.
In simple terms, companies borrow money from the public by issuing commercial papers. It is essentially an unconditional promise to pay back your money on an agreed future date with interest. The offer includes all the details of the transaction. You may be wondering why a company would approach the investing public for the loan rather than go to a bank. One advantage is the lower interest rate. Commercial papers are issued within the range of rates obtainable in the money market. That means you get to borrow at a rate cheaper than borrowing from the bank. This makes it cheaper to run their operations. For taking this risk, you also get an attractive return on your money.
Commercial Paper issuances by corporates have been on the rise so far in 2018 as companies finance expensive debt amidst a much lower interest rate environment. Treasury yields have averaged 12.4% in 2018 vs. 2017 average of 17.9%.
A breakdown of the current Commercial Paper Issuances from the FMDQ OTC Exchange shows that interest in the market has been cut across major sectors, including Financial Services, Consumer Goods, and Industrial Goods. Currently, the discount rate on Commercial Paper (CP) listings as quoted on FMDQ show discount rate range of 12% – 14%, much lower than typical bank overdraft rates and a mild spread on treasury securities.
Why Do Companies Issue Commercial Papers?
Commercial Paper issuance can serve as a preamble to any future bond offering by the issuer. Balance sheet efficiency creates greater potential funding capacity for the issuer. Issuance of Commercial Paper helps a company complement its other sources of working capital while diversifying its funding sources to include non-bank investors. It also enables companies to acquire investments that are tradable without a penalty.