11 Tips to Investment in Commercial Paper Business

Commercial Paper Business:The world of fixed-income securities can be divided into two main categories. Capital marketsconsist of securities with maturities of more than 270 days.

While the money market comprises all fixed-income instruments that mature in 270 days or fewer.

Commercial paper falls into the latter category.

And is a common fixture in many money market mutual funds.

This short-term instrument can be a viable alternative for retail fixed-income investors.

Who are looking for a better rate of return on their money.

Commercial Paper Business

Commercial Paper Business

11 Tips to Investment in Commercial Paper Business in Nigeria

Commercial Paper Business

1. Know the background

A commercial paper is an unsecured debt instrument issued by a company or corporation.

To raise working capital or meet short term liabilities.

It is regarded as unsecured because it does not have a bank guarantee in the event of default.

Commercial papers that come with bank guarantees are called bankers’ acceptance.

Commercial paper are similar to Treasury bills.

Commercial Paper Business

Due to the fact that it is a discounted instrument (interest is paid upfront) and is usually tax free.

Commercial paper was first introduced over 100 years ago.

When New York merchants began to sell their short-term obligations to dealers that acted as middlemen.

These dealers would purchase the notes at a discount from their par value and then pass them on to banks or other investors.

Commercial Paper Business

The borrower would then repay the investor an amount equal to the par value of the note.

Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase commercial paper.

And his company became one of the biggest commercial paper dealers in America following the Civil War.

The Federal Reserve also began trading commercial paper.

Along with Treasury bills from that time until World War II to raise or lower the level of monetary reserves circulating among banks.

Commercial Paper Business

After the war, commercial paper began to be issued by a growing number of companies.

And eventually it became the premier debt instrument in the money market.

Much of this growth was facilitated by the rise of the consumer credit industry.

As many credit card issuers would provide cardholder facilities and services to merchants using money generated from commercial paper.

The card issuers would then purchase the receivables placed on the cards by customers from these merchants (and make a substantial profit on the spread).

Commercial Paper Business

A debate raged in the 1980s about whether banks were violating the Banking Act of 1933 By underwriting commercial paper, since it is not classified as a bond by the SEC.

Today commercial paper stands as the chief source of short-term financing.

For investment-grade issuers along with commercial loans and is still used extensively in the credit card industry.

Commercial Paper Business

2. Know the difference

The key difference between Treasury bills and commercial papers is that the former is issued by the Federal Government.

While the latter is issued by corporations.

That means commercial papers are a bit more risky than Treasury bills.

Consequently, commercial papers often attract higher returns compared to government issued securities.

The tenor of commercial papers typically range from 15 days to 270 days.

Commercial Paper Business

In simple terms, companies borrow money from the public by issuing commercial papers.

It is essentially an unconditional promise to pay back your money on an agreed future date with interest.

The offer includes all the details of the transaction.

You may be wondering why a company would approach the investing public for loan rather than go to a bank.

Commercial Paper Business

3. Know the advantages

One advantage is the lower interest rate.

Commercial papers are issued within the range of rates obtainable in the money market.

That means you get to borrow at a rate cheaper than borrowing from the bank.

This makes it cheaper to run their operations.

For taking this risk, you also get an attractive return on your money.

Investment in commercial papers is regulated by the Securities and Exchange Commission.

Commercial Paper Business

In addition, quotation of commercial papers on FMDQ Platform.

Financial market daily quotes is a rigorous process that involves credit rating etc.

This is to protect the investing public and create confidence in the market.

Since commercial papers are listed on FMDQ, you can buy and sell them on the platform.

Companies seeking funds through issuance of commercial papers cannot afford to default.

It would severely impact their credit rating.

And limit their ability to access funds in future.

Through issuing commercial papers or other financial institutions.

Commercial Paper Business

 4. Know the accredited investor

Investment in commercial papers is open to accredited investors.

An accredited investor is any person.

Or institution capable of understanding and affording the financial risks associated with acquisition of unregistered securities.

This means you understand what you are doing (financial education) and can handle the risk if things do go otherwise.

Commercial Paper Business

The accredited investor includes qualified institutional investors or an eligible individual investor.

An eligible individual investor, or accredited individual investor is:

(i) Any person who alone, or with a spouse has a net worth of over N2m

(ii) Any person who alone had income in excess of N400,000 in each of the two most recent years (or with a spouse, in excess of N500,000 during this period)

And had a reasonable expectation of reaching the same income level in the current year (annual income).

The summary is that if you and your spouse earn up to a combined annual income of N500,000.

And understand what you are doing, you are an accredited investor.

5. Know the Subscription

The minimum level of subscription for an issue may be determined by the issuer and stated in the offer documents.

To invest in commercial paper, all you need to do is to make an enquiry at your bank or discount house.

It is as simple as asking your account officer or relationship officer at the bank.

They will get the information for you.

You will be advised what commercial papers are available, the terms including interest rate, tenor and minimum subscription.

See also: Current Start-ups Grants in Nigeria

6.Commercial Paper Business:Get the summary offer

Below is an example of the summary of an offer:

Indicative terms

Issuer: ABC Nigeria PLC

Arranger: XYZ Bank Limited

Issuer rating: ‘A2’(Short term, 2016) and ‘BBB+’(Long term, 2016) by Global Credit Rating Co. Limited

Status of the notes: Senior Unsecure

Commercial Paper Business

Programme size: N50bn

Issue size: Up to N5bn

Tenor: 181 days

Discount rate: 19.0194%

Implied yield: 21.2000%

Offer open: 26 Feb 2017

Offer close: 02 Mar 2017

Funding date: 03 Mar 2017

Use of proceeds: Working capital financing

Tax considerations: Free and clear of withholding taxes

Minimum Subscription: N5,000,000 and multiples of N1,000 thereafter.

See also:Top business Loan Givers in Nigeria

Commercial Paper Business

7. Know the basic characteristics of Commercial Paper

Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest.

It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations.

Such as funding for a new project.

As with any other type of bond or debt instrument.

The issuing entity offers the paper assuming that.

It will be in a position to pay both interest and principal by maturity

Commercial Paper Business

It is seldom used as a funding vehicle for longer-term obligations.

Because other alternatives are better suited for that purpose.

Commercial paper provides a convenient financing method.

Because it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans.

And the Securities and Exchange Commission (SEC) does not require securities that trade in the money market to be registered.

It is usually offered at a discount with maturities that can range from one to 270 days.

Although most issues mature in one to six months.

Read also:How to Get Federal Government Loans for Small Business in Nigeria

8. Commercial Paper Business:Know how to trade in Commercial Paper

It is possible for small retail investors to purchase commercial paper.

Although there are several restrictions that make it more difficult.

Most commercial paper is sold and resold to institutional investors.

Such as large financial institutions, hedge funds and multinational corporations.

A retail investor would need access to very large amounts of capital to buy and own commercial paper.

Commercial Paper Business

Otherwise, indirect investment is possible through mutual funds.

Exchange-traded funds (ETFs) or a money market account administered and held at a depository institution.

Factors such as regulatory costs, scale of investable capital, and physical access to the capital markets.

Can make it very difficult for individual or retail investors to buy and own commercial paper.

For example, commercial paper is typically sold in round lots totaling #100,000.

This threshold in itself makes buying commercial paper generally exclusive to institutional investors and wealthy individuals.

Commercial Paper Business

Further, broker-dealers issuing commercial paper on behalf of a client have pre-existing relationships with institutional buyers that make the market efficient through large purchases of primary offerings.

They would not be likely to look to individual investors as a source of capital to fund the transaction.

Read also:Tips to Apply for Conventional Business Loan in Nigeria

9. Know the Characteristics of Companies That Issue Commercial Paper:

  • Favorable Credit rating.
  • Strong brand and reputation.
  • Experienced and stable management team.

10. Know Why  Companies Issue Commercial Papers?

  • Commercial Paper issuance can serve as a preamble to any future bond offering by the issuer. Balance sheet efficiency creates greater potential funding capacity for the issuer.
  • Issuance of Commercial Paper helps a company complement its other sources of working capital, while diversifying its funding sources to include non-bank investors.
  • It also enables companies acquire investments that are tradable without a penalty

11. Know the  gain from Commercial Papers:

  • Commercial Paper is a liquid instrument with strong secondary market trading possibilities making it an attractive product for potential investors.
  • It can help to provide greater risk diversification for investors.

In Nigeria, some of the banks and companies have issued Commercial Papers include; Skye Bank, Nigerian Breweries, and Guinness Nigeria Plc.

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