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Monday 13 May 2019
BUSINESS DAY
Explainer BONDS
Inside the world of FGN Savings Bonds OLUWASEGUN OLAKOYENIKAN
L What you should know about commercial papers as an alternative source of funding HOPE MOSES-ASHIKE
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or mid-level organisations across different industries, one financial instrument that has not received much attention in terms of direct funding required for working capital funding, are Commercial Papers. This is because such organisations have not explored the possibilities of accessing commercial papers and this is due to a lack of awareness of its numerous benefits when it comes to raising funds. With the right financial advisory, these organisations can easily finance day to day short term expenditures by investing in Commercial papers. “CPs” as they are often called, provides a cheaper source of funding in comparison to other securities. In very simple terms, Commercial Papers are short-term debt financing securities with a 3 to 9 months maturity period. They usually consist of discounted promissory notes issued by large corporations with good credit ratings. Commercial papers are typically for working capital, and are generic, with a structure that allows for ease of investment and exits via a recognised exchange. These financial instruments are open to all
kinds of investors, ranging from individuals to financial institutions such as banks, asset managers, trustees and corporate treasuries. A total of N505.30 billion was raised in 2018 through CPs programmes by various corporates, representing 231.8 percent rise over the N152.35 billion recorded in 2017. There were a total of 60 CPs quotations on the FMDQ OTC Securities Exchange in 2018 against 33 CPs quotations in the previous year. Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), at July 2018 Monetary Policy Committee (MPC) meeting urged the large corporate to issue commercial paper notes to boost credit to the real economy at lower rate. Issuing commercial paper notes is beneficial to an investor as it provides attractive investment opportunities. Commercial papers are cheaper than bank loans. So what makes Commercial Papers an alternative source of cheap funding? Issued at a discount: Commercial Papers are issued at a discount which means the demands for periodic interest payments have been eliminated in preference for single payment at maturity. This helps firms manage their cash flows. www.businessday.ng
Lower Interest Rate: Commercial papers are issued at lower lending rates than what is obtained from commercial banks. This makes it less expensive for firms and businesses to run their operations and can quickly meet short-term or working capital funding at relatively cheaper rates. Funding from the Capital Market: This makes it a less expensive source of funding as the capital market is more liquid compared to other sources of short term funding. For Issuing Houses like FBNQuest Merchant Bank, providing advisory for organisations who require such funding is at the core of its investment banking division. It is important for such organisations to seek the right type of advisory when looking to invest in commercial papers. The process of issuance of CPs, is straightforward with a detailed step by step approach, documentation and guidance from the issuing house. For investors, FBNQuest helps with the application process, deposit with the CSCS (Central Securities Clearing System) and payment to the investors at maturity. Investors are urged to contact FBNQuest Merchant Bank at Fbnquest.com/merchantbank to find out more on how to invest in Commercial papers.
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ow-income earners with excess money lying fallow in their accounts may be missing out on some investment opportunities in the monthly Federal Government of Nigeria (FGN) Savings Bonds, particularly if the interest rates on the instruments are further raised next month. No doubt, “investment” is fast becoming one of the most frequently used words as awareness on financial literacy gains momentum in Nigeria, but not as much as those who have heard the word can find their way around investing in the nation’s financial markets. Last week, the stock market slumped to its weakest level in two years amid sell pressures despite relatively impressive first quarter results, the development may have further discouraged some potential investors who were skeptical about the possibility of a market rebound in the short to medium term. An alternative to stock investment for risk-averse individuals is the FGN Savings Bonds issued monthly by the Debt Management Office (DMO). This form of investment basically allows investors to loan out their excess money to the federal government for an agreed period while they earn a percentage of their investment annually, semiannually or quarterly until the bond matures and the investor gets his initial payment. Proceeds from these bonds are used by the federal government to fund its budget deficit. It also helps in promoting savings culture and enhancing financial inclusion in the country as income earned from the instruments is exempted from taxes. The agreed time for the repayment of the bond is referred to as maturity date; the percentage of the investment to be paid every three
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months is coupon; while the investor is called the bondholder. In an auction conducted last week, the DMO offered two-year and three-year FGN Savings Bonds for subscription for the month of May with higher interest rates compared with those issued in the previous two months. Also, the DMO assured a quarterly coupon payment for the bonds. The two-year tenor was offered at 11.745 percent, while the three-year instrument was offered at 12.745 percent. These correspondingly represent higher rates compared with 11.276 percent and 12.276 percent which the debt instruments were issued in April, and 11.62 percent and 12.62 percent in March. This implies investors can get more value for their investment and much more if the country’s inflation rate sustains its downward trend having decelerated for three straight months to March this year. A N50,000 invested on a threeyear bond tenor in May 2019 at 12.745 percent would deliver N6,372.5 every three months till May 2022, bringing the total possible coupon payment to N76,470 excluding the bullet repayment of the invested N50,000 due on the maturity date. How to participate The bonds are first issued to the public in the primary market in an auction system just like it was conducted last week but can later be sold at the secondary market if the investor wishes to opt out before the maturity date. Interested investors can contact stockbroking firms appointed as distribution agents by the DMO. A list last updated on February 6, 2019, and containing 129 agents can be accessed on the debt agency’s website. A unit of either of the bonds cost N1,000. However, investors are expected to make a minimum subscription of N5,000, translating to 5 units of the instrument. This subscription can later be increased in multiples of N1,000, but such subscription cannot exceed N50 million. Investments in these bonds are backed by the full faith and credit of the Federal Government of Nigeria and charged upon the general assets of the country, indicating investments in the asset are safe as it is almost impossible for the government to default payment.