Big companies shun public offers, raise N2.7trn from commercial papers -GCFRNG
Only N1.89bn for public offering
• Analysts see danger of capital mismatch
• List the interest rate, the political environment, and others as determinants.
There are indications that Nigeria’s main corporate institutions have abandoned the public offering of their shares on the capital market, the traditional medium and long-term financing option for these institutions.
Financial Vanguard’s findings show that companies are now raising such capital through the debt capital market, DCM, specifically, commercial documents, CP, which is more short-term.
Consequently, only one company, Skyway Aviation Handling Company (SAHCOL), has raised around N1.89 billion from the Public Offering since 2014, when the CP window emerged as the preferred option.
On the other hand, more than 20 companies from various sectors of the economy have raised a total of 2.7 trillion naira from the CP option in the same period.
The companies are MTN Communications Plc, Dangote Flour Mills Plc, Flour Mills of Nigeria Plc, Coleman Technical Industries Limited, FSDH Funding SPV Plc, International Breweries Plc, Union Bank of Nigeria Plc, FBNQuest Merchant Bank, Sterling Bank Plc, among others.
CPs are short-term debt financing securities (no more than 270 days in term) consisting of unsecured and discounted notes issued by large corporations with good credit ratings, which can be easily traded.
Capital market experts blamed the shortage of the Public Offering market on the challenges of hostile and inconsistent macroeconomic policies, regulatory and monetary environments, and a lack of strategic planning for national development.
They also express concern that the CP option represents a capital mismatch for companies that use it to finance long-term expansion projects.
But some of them also point to investors’ lack of appetite for equities, which persisted long after the stock market crash in 2009, which hit retail investors hard.
The negative sentiment, according to them, negatively affected SAHCOL’s Public Offering of Sale of 406.1 million common shares valued at N1.89 billion in April 2019, which registered a weak subscription at 35 percent.
In the context of the comatose grocery option, the FMDQ had championed PC market reform in 2014, which reactivated activities in the PC market.
But analysts claimed that although CPs are short-term debt financing securities, some of the companies are using the money to finance long-term expansion projects, putting stakeholders at a disadvantage in terms of low return on investment or even risk of default.
They urged the government to initiate strategic policies that will grow businesses in the country and address the challenges of hostile and inconsistent macroeconomic policies and regulatory environments that impede the nation’s development.
This, they say, would help address lingering stock market volatility, restore investor confidence, put the market on a sustainable rally, and attract companies to the nation’s stock market.
Analyst positions
Commenting on the market development, InvestData Consulting Limited analyst and COO Ambrose Omordion said: “Investors anywhere in the world want to make a profit or a good return on their investment with less risk.
“The unattractiveness of our market despite the oil rebound was due to a hostile business environment, growing insecurity challenges, unclear economic policies, and crises in the nation’s currency market.
“The government and its economic managers should rethink and reformulate policies that will attract more companies to the capital market to boost economic recovery.
“Companies are avoiding equity financing due to fear of property dilution and the high cost of raising funds in the stock market.
“This high cost has been reflected in low primary market activities such as Initial Public Offerings, IPOs and others.
The implication is that the market will lack depth as many sectors of the economy are not fully represented in the exchange. This will allow few stocks to dominate the index and restrict access to investment.
“It is not a good strategy for companies to opt for CP and use the profits for long-term projects.
“Even using it for short-term financing is not the best, as it will also affect the return on investment when profits are reduced.”
On the way forward, he said: “Regulators should review the cost of raising funds and listing requirements to attract more companies to raise funds through stocks and encourage listing.”
Similarly, FSL Securities analyst and head of research and investment Victor Chiazor said: “The increased appetite for commercial paper is largely due to the environment of low perceived interest rates.
”Companies believe that they can raise capital at a very decent rate that will not be toxic to their business operations and, given the low level of activities in the capital market, most companies may not want to take the risk of attempting to raise capital that may or may not be successful.
“Until we can attract a significant portion of companies to the market and increase the participation of domestic and foreign investors, volatility and market activities in the stock market will remain subdued at most.”
On the way forward, he said: “Capital market regulators could bring more problems to the market with incentives such as reduced transaction cost, introduction of tax cuts and elimination of bottlenecks in application processes. “.
On why companies prefer CPs, he said: “Fundraising for project expansion and working capital through CP has become a faster and cheaper way for companies to raise funds for their businesses in compared to the cost of raising such funds through the stock market. “
Also commenting on Highcap Securities’ analyst and vice president, David Adonri, said: “Trade papers (CPs) are short-term money market instruments used to finance working capital, while stocks are long-term instruments that they are used to finance fixed or long-term assets. They serve different purposes.
”The increasing issuance of CP may be due to the increased need for short-term working capital financing rather than the need for project financing. Economic conditions often dictate the preferred type of financing.
Second, CPs may be increasing due to the recent interest rate drop, allowing companies to roll over their previous exposures at high rates.
The primary equity market has been inactive since the global crisis of 2008.”
On the way forward, he said: “Boosting the primary equity market requires a multi-sector approach.
From a monetary policy perspective, the interest rate must be kept in one digit lower. For this to hold, fiscal policies along with monetary policies must simultaneously drive the inflation rate to lower one digit.
This will encourage financial assets to migrate to equities. Next, investor confidence must be increased so that they know that the primary market is safe, profitable and liquid.
It is also necessary to increase the trust of issuers so that they are no longer afraid that their issues will not be fully subscribed.
With all these measures mentioned above, if the socio-political environment is not conducive, the confidence of investors and issuers will not improve.
Unless the government adopts policies that ensure security, reduce operating costs and provide a world-class infrastructure, issuers cannot approach the capital market to raise funds.”
In his own reaction, APT Securities Limited analyst and managing director Mallam Garba Kurfi said: “The price of the shares is below fair value, which discourages companies from issuing shares at discount value rather than choose to go to the fixed income market through bonds or CP.
CPs are also cheap compared to bank loans. By the time the market corrects itself, the stock market will rebound. “
An independent investor, Patrick Ajudua, said that increasing CPs is less complicated because the company is not required to comply with state and federal securities laws and regulations.
He said: “The time frame required to raise capital through the debt equity market is shorter compared to raising funds through the equity market due to regulatory requirements.
Because the lender has no interest in the CP business, it does not dilute the ownership interest in the company.
In the CP issue, the lender is only entitled to repayment of the principal of the investment plus interest, and has no direct claim on the future earnings of the company.
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Big companies shun public offers, raise N2.7trn from commercial papers -GCFRNG