HIGH OPERATING COSTS FORCE COMPANIES TO TURN TO THE DEBT MARKET FOR FINANCING

Nigerian businesses have turned to the debt market to raise money in order to balance the impact on their operational costs of continued rises in the price of diesel, the naira's devaluation, and currency shortages, among other things.

Manufacturers have been under a great deal of stress as a result of rising fuel and raw material prices, currency shortages, severe inflationary pressure, and other factors that have significantly increased their operating costs.

Due to the difficult economic climate, many businesses increasingly prefer to borrow funds for their operations by issuing commercial papers (CPs) on the debt capital market (DCM) rather than through traditional stock financing.

Businesses have continued to raise financing through the DCM, particularly through the commercial papers, which are more short term in nature.

Neimeth International Pharmaceuticals is the sole business that has expressed interest in financing N3.680 billion through right offerings on the Nigerian stock market.

On the other hand, from January to June 2022, 17 businesses from various economic sectors filed N857 billion worth of commercial papers on the floor of the FMDQ Securities Exchange.

The registration of MTN Nigeria Communication's N150 billion CP has received FMDQ approval. While Rand Merchant Bank Nigeria listed N80 billion CP, FCMB Group, FBNQuest Merchant Bank, Providus Bank, and Coronation Merchant Bank each listed N100 billion CP on FMDQ.

Other businesses include Total Nigeria, Babban Gona Farmer Services Nigeria, Nova Merchant Bank, Lekki Gardens Estate Limited, Robust Intentional Commodities Limited, UAC of Nigeria (UACN), SKLD Integrated Services, Veritasi Homes and Properties, Skymark Partners, and Mixta Real Estate.

According to them, doing so would aid in addressing the ongoing stock market instability, bring about a lasting comeback, and draw new problems to the country's stock exchange.

According to Tunde Oyediran, a stockbroker of Calyxt Securities Limited, stock market authorities might entice additional securities to the market by offering incentives including lower transaction costs, new tax breaks, and the elimination of application process bottlenecks.

When compared to the price of obtaining such funds through the equity market, he said that raising money for working capital through CP has grown to be a quicker and less expensive method for businesses to receive finance for their operations.

The issuing of Commercial Papers (CPs) has similarly emerged as the new trend in the Nigerian capital market, according to Ambrose Omordion, chief operating officer of InvestData Consulting Limited.

“Businesses turn to commercial papers rather than short-term borrowing from Nigerian commercial banks when they need a liquidity infusion to satisfy working capital requirements,” he said. The current market interest rates in the nation are reflected in the way that CPs are normally issued: at a discount to face value.

As a result, because commercial bank lending has a higher interest rate, it is less expensive for businesses to raise money through the commercial paper markets.

Regarding equity financing, he added, Equity financing is unfavorable to enterprises due to the bad macroeconomic climate, persistent stock market volatility, low investor involvement, and other obstacles associated to the stock market.

Other issues that have drawn businesses to the commercial markets sector are the high transaction costs and the challenging application procedure for issuing equity.

The cost of obtaining capital and listing requirements should be reviewed by regulators in order to encourage listing and stimulate the use of equity financing by more enterprises.

In contrast to stocks, which are long-term securities used to finance fixed or long-term assets, commercial papers (CPs) are short-term money market products used to finance working capital, according to David Adonri, vice president of Highcap Securities Limited. They provide many services.

The demand for short-term working capital financing may be greater than the requirement for project finance, which would explain the rising issuance of CPs.

The managing director of APT Securities Limited, Mallam Garba Kurfi, responded, saying, Equity prices are below fair value, deterring firms from offering equity at discount pricing; instead, they decide to go to the fixed income market through Bonds or CPs. The CPs are also more cost-effective than bank loans.

According to Bola Koko, the chief executive officer of FMDQ Group, “as the Nigerian DCM continues to witness significant activity with diverse corporate institutions tapping the market as an efficient alternative to meeting their funding and liquidity req, FMDQ Exchange will keep providing timely and cost-effective services to assist its stakeholders, particularly issuers and investors, in accessing capital, managing risks, and invariably improving their financial situation.”