•Only N1.89bn for Public Offer
•Analysts see danger of capital mismatch
•List interest rate, policy environment, others as determinants
By Peter Egwuatu
There are indications that Nigeria’s leading corporate institutions have abandoned public offer of their shares in the capital market, the traditional medium to long term funding option for such institutions.
Financial Vanguard findings show that the companies are now raising such capital through the Debt Capital Market, DCM, specifically, the Commercial Papers, CPs, which is more of short term.
Consequently, only one company, Skyway Aviation Handling Company (SAHCOL), has raised about N1.89 billion from the Public Offer since 2014 when the CP window emerged the preferred option.
On the other hand, more than 20 companies cutting across several sectors of the economy, have raised a total of N2.7trillion from the CP option within 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 longer than 270 days in tenor) consisting of unsecured and discounted promissory notes issued by large corporations with good credit ratings, which can be readily traded.
Capital market experts blamed the dearth of Public Offer market on challenges of hostile and inconsistent macro-economic policies, regulatory, monetary environments and lack of strategic planning for national development.
They also express worry that the CP option represents a capital mismatch for companies using it to finance long term expansion projects.
But some of them also points to lack of investor appetite for equities which had persisted long after the stock market crash in the 2009 which took heavy toll on retail investors.
The negative sentiment, according to them, adversely affected the SAHCOL Public Offer for sale of 406.1 million ordinary shares valued at N1.89 billion in April 2019, which recorded weak subscription at 35 per cent.
At the backdrop of the comatose PO option the FMDQ had championed the CP market reform in 2014, which revived activities in the CP market.
But analysts stated though CPs are short-term debt financing securities some of the companies are using the money to finance long term expansion projects, thus putting the stakeholders at disadvantage position in terms of low return on investment or even risk of default.
They urged the government to initiate strategic policies that would grow businesses in the country and address challenges of hostile and inconsistent macro-economic policies and regulatory environments impeding the nation’s development.
This, according to them, would help tackle the persistent stock market volatility, restore confidence of the investors, put the market on a sustainable rebound, and attract companies to the nation’s bourse.
Commenting on the market development, analyst and Chief Operating Officer, InvestData Consulting Limited, Ambrose Omordion, said: “Investors anywhere in the world want to make profit or good return on their investment with less risk.
“The unattractiveness of our market despite the rallying oil was as a result of unfriendly business environment, rising insecurity challenges, unclear economic policies and crisis in the nation foreign exchange 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 shunning equity funding due to fear of ownership dilution and high cost of raising funds in stock market.
“This high cost has reflected on low primary market activities such as Initial Public Offerings, IPOs and others.
”The implication is that the market will lack depth as many sector of the economy are not fully represented on the exchange. This will allow few stocks to dominate the index and restrict investment access.
”It is not a good strategy for companies to go for CPs and use the proceeds for long term projects.
“Even using it for short term funding is not even the best as it will also affect the return on investment when profit is reduced.”
On way forward, he said: “Regulators should review the cost of raising funds and listing requirements to attract more companies to source funds through equity and encourage listing.”
Similarly, analyst and Head of Research and Investment, FSL Securities, Victor Chiazor, said: “The increased appetite for Commercial Paper is largely driven by the perceived low interest rate environment.
”Companies believe they can raise capital at a very decent rate which will not be toxic to their business operations and given the low level activities in the capital market, most companies may not want to take the risk of trying to raise equity which may or may not be successful.
”Until we are able to attract a significant portion of companies to the market and increase both domestic and foreign investors’ participation, volatility and market activities in the equities market will remain moderate at the most.
On way forward, he said: “Capital market regulators could attract more issues to the market with incentives such as reduction in transaction cost, the introduction of tax cuts and eliminating bottlenecks around application processes.”
On why companies prefer CPs, he said: “Raising funds for project expansion and working capital through CP has become a faster and cheaper way for companies to get funding for their business when compared to the cost of raising such funds through the equities market.”
Commenting as well analyst and Vice President, Highcap Securities, David Adonri, said: “Commercial Papers (CPs) are short term money market instruments used to finance working capital while equities are long term instruments used to finance fixed or long term assets. They serve different purposes.
”The increasing issuance of CPs may be due to increase in need for short term working capital finance rather than necessity for projects finance. Economic conditions usually dictate the preferred type of finance.
”Secondly, CPs may be rising due to recent drop in interest rate thus enabling enterprises to refinance their earlier high rate exposures.
“Equities primary market has been dormant since the 2008 global meltdown.”
On way forward, he said: “Boosting the primary market for equities requires multi sectoral approach.
“From monetary policy perspective, interest rate must be kept at lower single digit. For this to be sustained, fiscal policies in conjunction with monetary policies must simultaneously bring inflation rate to lower single digit.
“This will encourage financial assets to migrate to equities. ”Next, investors’ confidence must be raised for them to know that the primary market is safe, profitable and liquid.
”Issuers’ confidence also needs to be increased so that they no longer exercise any fear that their issues may not be fully subscribed.
”With all these measures stated above, if the socio-political environment is not conducive, investors and issuers confidence will not be enhanced.
“Unless the government adopts policies that will guarantee security, reduces operating costs and provide world-class infrastructure, issuers cannot approach the capital market to raise funds.”
In his own reaction, analyst and Managing Director, APT Securities Limited, Mallam Garba Kurfi, said: “The price of equities are below the fair value that discourages companies from issuing equity at discount value rather they choose to go to fixed income market through Bonds or CPs.
”The CPs are also cheap compared with bank loans. By the time the market corrects itself equities market will rebound.”
An independent investor, Mr Patrick Ajudua, said raising 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 debt capital market is shorter when compared to fundraising through the equities market due to regulatory requirements.
“Because the lender does not have a claim to equity in the business in CP, it does not dilute the ownership interest in the company.
”In the issuance of CPs, the lender is entitled to only the repayment of the principal of the investment plus interest, and has no direct claim on future profits of the business.”