Interest Rate: Companies Scale Back on Commercial Papers Issuance
Corporate borrowings have continued to decline across the Nigerian key sector as private sector scales back on the back of multifaceted pressures facing businesses, and individuals.
Nigeria’s very high inflation rate caused the authority to raise benchmark interest rate to 26.75%. This has raised banks lending rates and forced companies to look elsewhere to meet their financial needs.
However, the same market dynamics raise rates on commercial papers, and other short term borrowings options across the financial markets.
High debt and costs have caused reduced margins on corporate earnings. “The economy is weak. High inflation attracted a decision to hike borrowing rates and except there is cogent reason growing a business with borrowing funds is an unnecessary adventure”, A CEO said in a chat with MarketForces Africa.
“When you borrow to produce, the expectation is to sell. As it is today, economic conditions has tempered aggregate consumption and it is becoming very difficult to pass higher costs to consumer who are already stretched”.
Corporate borrowers have shifted attention to commercial papers issuance to fund their working capital. The market witnessed flood of commercial paper raised in the market in recent years before things went sour for businesses and individuals as unintended consequences of economic reforms.
The lower interest rate offered on commercial paper compared to borrowing from local deposit money banks has always been main attraction. However, the market has provided an option, either to take funds to commercial paper or follow track in the fixed income market with elevated yield.
Again, unusual events in the markets have also caused an inverted yield on government bonds, thus, redirecting investable funds to short-dated government instruments which pay higher than longer maturities.
In July, total commercial papers listed on FMDQ platform declined strongly in as companies slow down their borrowings plan amidst high interest rate environment.
In its latest update, FMDQ said there were no new listings and redemptions of Non-Sovereign Bonds listed on the Exchange in July 2024. As such, the value of Non-Sovereign bonds outstanding remained flat at ₦2,192.02 billion.
According to its monthly report. FDMQ also stated that the total value of commercial papers (CPs) quoted on the securities exchange platform in July 2024 was ₦17.79 billion, representing a month on month decrease of 80.78% or ₦74.75 billion from the value of CPs quoted in June 2024 totaling ₦92.54 billion.
In July 2024, quoted CPs were majorly issued by institutions from the Financial Services sector, jointly followed by the Manufacturing, Agriculture, Health, and Oil & Gas sectors.
As a result, the outstanding value for CPs decreased by 8.71% or ₦85.24 billion, to ₦893.28 billion in July 2024, offsetting the impact of the ₦103.03 billion worth of CPs that matured during the review period. #Interest Rate: Companies Scale Back on Commercial Papers Issuance
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