CP Market Gains Traction As Investors Rebalance Portfolios


Monday, February 10, 2020   /  04:30AM / Adaeze Nwachukwu, Research Intern / Header Image Credit: fmdqgroup.com

Investors rebalancing their portfolios in the year 2020 are beginning to add Commercial Papers (CPs) to the mix. The rise in CP interest is associated with falling yields in other money and capital market instruments and the generally bearish outlook for the Nigerian economy which grew at +2.28% in Q3 2019.


The number of companies raising short-term loans through commercial papers has been on the increase since 2019 (see tables 1A & 1B below).


Tables 1A & 1B CPs Issued In Nigeria Between Jan. 2019 and Jan. 2020

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The shift to corporate bonds is as a result of several interacting market-related issues such as the following;

  • CP rates are cheaper relative to contemporary bank credit facilities. Despite a rise in the banking sector loan to deposit (LDR) requirement of 65%, corporations still find it more attractive to borrow from an increasingly liquid direct commercial loan market by way of CPs, leveraging on the company's corporate reputation and business prospects.
  • Falling market yields resulting from a rise in the price of Treasury bills (T-bills) and Treasury bonds (T-bonds) leading to a fall in treasury market liquidity and an increase in the attractiveness of the CP market as investors withdraw from treasury instruments.
  • CPs of big-cap companies (especially those listed on the Nigerian Stock Exchange (NSE)) have become a viable alternative to both the equities market (which saw an NSE ASI yield to date of +4.56% as of Friday 7, February 2020) and government 90-day treasury yields of +4.79% with a Friday February 14, 2020 maturity. The stock market while still posting a positive year-to-date (YTD)


The CP market has more recently involved FBNQuest Merchant Bank Series 18 paper for N3.3bn, StanbicIBTC Series 51 paper at N49.5bn, CERPAC Series 1 paper for N2.7bn and Mixta Real Estate Series 12 paper for 2.5bn. These papers have a November 2019 issue date. In January 2020, the market was still active with the brewing giant, Nigerian Breweries Plc raising N15bn in a 183-day Series5 paper, while floating a further N30bn in a 270-day series 6 paper. Nigeria Flour Mills Plc raised N20bn in a Series 3 Tranche "A" paper for a 3-year instrument at a yield of 9.7%, while another N20bn followed under a Series 3 Tranche "B" paper for a 5-year maturity at a yield of 10.85%.


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Falling equity market returns may encourage further investment in high-quality CPs over H1 2020 as a rebound in the equity market is not expected until the second half of the year, and this in turn is dependent on the outlook of the international oil market which has been bearish YTD with both Brent and WTI Crude Oil tumbling in Q1 2020 (oil price has dropped -18.53% since the beginning of 2020).

The CP market outlook appears strong as investors are likely to continue to fully subscribe to new issues as a softening of equities and treasuries force fund managers to scavenge for alternative investment opportunities (see NSE ASI movement for 2019 in chart 1 below).


Chart 1 NSE ASI Monthly Movement January -December 2019

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Source: NSE, Proshare Research


As the bearish disposition of the stock market continues (see chart 1 above the NSE ASI had fourth months of positive growth and eight months of negative growth in 2019) and treasury yields fall as prices rise, portfolio managers will need to increasingly rejig their investment buckets to ensure yields higher than the inflation-adjusted yields of fixed income securities and the market yields of corporate equities. Few analysts envy investment fund managers in 2020 as keeping yields above the inflation rate (recently estimated at +11.98% in December 2019) appears to be a tall order.


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Proshare Nigeria Pvt. Ltd.

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