Editor’s note: This is general educational information about how Nigerian commercial paper is priced and why a quoted discount rate is not the same thing as the return an investor earns. It is not investment advice and it does not evaluate any issue. Every rule, definition and figure below comes from the official documents listed at the end.
Analysis: two regulators, two tenor limits, one instrument
The most consequential detail for anyone comparing Nigerian commercial paper offers is that the two documents governing them do not state the same maximum tenor. The Commission’s rule sets a maximum of 364 days including rollovers. The exchange guidance describes a maximum of two hundred and seventy days inclusive of rollovers. Those are different ceilings on the same instrument, published by the securities regulator and by the exchange on which the paper is quoted. The likeliest explanation is sequencing, since the Commission’s commercial paper rule arrived in a later batch of new rules and sundry amendments while the exchange guidance reflects the earlier framework, but the practical point stands: an investor reading a tenor against the wrong ceiling is reading against a rule that may no longer bind. The date on the document matters as much as its contents.
The second observation concerns what the discount convention does to comparison. Because a discount is quoted on face value and a coupon is quoted on the amount invested, two CPs with identical economics can be advertised with different looking headline numbers depending only on which convention the issuer chose, and the Commission’s rule expressly permits either by requiring the prospectus to disclose the discount or interest rate. Nothing in the rules requires the two to be presented on a common basis. The comparison work falls entirely on the reader, and it is arithmetic the offer document does not perform.
There is a third point that follows from the rollover rule. Treating each rollover as a new and separate issue, and requiring investor consent, means a CP programme is not a revolving facility from the investor’s side. The investor’s exposure ends at each maturity and is re-created only by a fresh decision, which is what makes a 270 or 364 day ceiling meaningful rather than nominal. An issuer with a three year programme is not funded for three years; it is funded one tranche at a time, and the discount rate on each tranche is a fresh price for the same credit.
What these documents do not show is where those prices have actually settled. Neither the rules nor the guidance publishes discount rates or yields on individual issues, and the market size figure quoted above is a historic milestone rather than a current level. The quotation and pricing supplements filed for each series, and the exchange’s own quotation records, are where the numbers that answer that question would be found.
What the documents say
A commercial paper offer in Nigeria is often described by a single number, and that number is frequently a discount rate rather than a yield. The two are not the same, and the gap between them is not a rounding artefact. It follows directly from what a discount instrument is: a promise to pay a fixed face amount at maturity, sold today for less than that amount. The discount is quoted against the face value. The return is earned on the smaller sum the investor actually parts with.
What the instruments are
FMDQ Exchange describes commercial papers as unsecured short-term interest bearing or discounted money market instruments, issued in the form of promissory notes by corporates to fund working capital requirements. The Securities and Exchange Commission’s rule on the issuance of commercial papers defines a CP as an unsecured promissory note with a maturity of not less than 30 days and cumulatively not more than 364 days, including rollovers.
Whether a particular issue pays interest or is sold at a discount is the issuer’s choice. FMDQ states that CPs may be interest bearing or issued at a discount to face value as may be determined by the issuer. The Commission’s rule requires the draft prospectus to set out the basic terms of the CPs, including credit enhancement, rollovers, minimum subscription, discount or interest rate, maturity and listing, which is why both conventions appear side by side in offer documents.
The rest of the framework is conventional short-term debt regulation. Under the Commission’s rule an issuer must have been in operation for a minimum of five years and have three years of audited financial statements, the minimum size of a CP issue is One Hundred Million Naira (₦100,000,000) or such minimum as the Commission may set, every issue and every rollover is treated as a new and separate issue, and a CP may be issued by public offer or private placement. FMDQ’s own guidance puts the minimum size at ₦100.00mm with multiples of ₦50.00mm thereafter, requires an issuer or issue rating of minimum investment grade from a rating agency registered or recognised by the Commission, and holds CPs in dematerialised form with a recognised central securities depository.
What a discount actually measures
The Commission’s investor education material for bonds gives the cleanest definition of the term as it is used in this market. Discount is described as the condition under which the par value of a security exceeds its market price, with the worked example that a N100,000 par amount bond valued at N 98,000 is trading at a 2% discount, calculated as the difference between par and price divided by par.
The denominator is the point. The discount is expressed as a percentage of the face value, which is the amount the investor receives at maturity, not the amount the investor pays at issue. An investor who buys at a discount lays out less than face and receives face later, so the profit is measured against a smaller base than the one used to quote the rate. A yield does the opposite: it measures the return against what was actually invested. For any instrument sold below par, the yield calculated on the purchase price is therefore higher than the discount rate quoted on the face value, and the gap widens as the discount deepens and as the tenor lengthens.
Tenor is the second complication. The Commission’s rule allows a CP to run up to 364 days including rollovers, and FMDQ’s guidance describes tenors from a minimum of fifteen days to a maximum of two hundred and seventy days inclusive of any rollovers from the date of issue. A rate quoted over a period shorter than a year is not directly comparable to an annual rate on a bond or a bank deposit unless it is annualised, and a rate quoted on face value is not comparable to one quoted on price. Two adjustments stand between the headline number and anything an investor can put alongside another instrument.
Rollovers and the programme structure
Most Nigerian CPs are issued under a programme rather than one at a time. FMDQ describes a CP programme or shelf registration under which the issuer may issue several series or tranches with separate maturity dates, or reopen existing issues where there is no change in the maturity date, with programmes valid for three years and extendable under the rules. HillCrest Agro-Allied Industries Limited’s ₦2.42 billion Series 1 and ₦9.31 billion Series 2 commercial papers, quoted under a ₦30.00 billion CP issuance programme, are a recent example of that structure in use.
Rollovers are governed rather than assumed. The Commission’s rule treats each rollover as a new and separate issue, and FMDQ’s account of the market reform describes rollover governance in which matured CPs are approved for rollover only with the consent of investors. On the size of the market, FMDQ reported that registered CP programmes on its platform had crossed ₦1.00 trillion in value, a market it describes as having declined to zero levels by 2013 before the reform that followed the Central Bank of Nigeria’s 2009 guidelines and FMDQ’s own 2014 rules.
