By Babajide Komolafe
Commercial papers are the corporate version of TBs. They are issued by companies that want to raise/borrow money from the public.
Some of the companies that have issued commercial papers this year include FCMB Group Plc, Coleman Technical Industries Limited, Fidson Healthcare Plc and Dangote Cement Plc.
Commercial Papers or CPs usually come in two duration/tenors namely; 180-Days and 270-Days. The minimum amount that can be invested is usually N5 million. Also CPs usually offer higher interest rates than treasury bills, TBs. For example, interest rate on 180-Days TBs is 15 per cent, while CP of the same tenor comes at 20.65%.
It is however important to note that the risk of losing money invested in TBs is near zero because the government will always exist and can issue money to repay borrowers. Investment in CPs comes with some risk because the company that issued the CP may collapse and hence fail to repay investors.
Also, because CPs are discounted financial instruments (read part one to understand), you can obtain your interest upfront or reinvest it as explained in the last edition under TBs).
Though CPs are used by private companies to borrow money from the public, the CPs are issued and sold on their behalf by financial institutions licensed by the CBN and SEC to do so. These include commercial banks and investment firms. Thus, the company borrowing the money is called the ‘Issuer’, while the financial institution helping the company to issue the CP to borrow the money is called the Issuing agent. The financial institution can also act as the collecting/receiving agent by collecting funds from investors on behalf of the Issuer.
There are different types of CPs. “Asset-Backed CP” means one that is collateralized or secured by physical assets of the Issuer. Hence, if the company issuing the CP collapses, its physical assets will be sold and the money used to repay investors in the CP.
A Guaranteed-Backed CPs is one that is guaranteed by the Federal Government, CBN-Licensed Banks, Development Finance Institutions, Credit Guarantee Agencies and Corporations or any institution approved by SEC for such purposes. The guarantor is responsible for repaying investors in case the company that issued the CP default for any reason.
The CP must first be approved by the SEC before it can be issued and sold to the public, and one of the conditions for approval is credit rating of the ‘Issuer’.
CPs are usually widely publicised by the issuing agents, with details of the CPs, including maturity/tenor, interest rate, and the various financial institutions party to the issue as well as their roles.
The process of investing in CPs is similar to that of TBs via banks and investment firms.
See previous edition to be acquainted with the process.