A Commercial Paper (CP) is an unconditional promise by a person to pay a certain sum at a future date on the order of another person. Such an instrument may or may not carry a bank’s guarantee. Where a bank guarantees the CP to make it more marketable in the money market, the instrument acquires the force of a Banker’s Acceptance (BA) and the bank incurs a contingent liability. Recently, the Central Bank of Nigeria (CBN) rolled out guidelines on the issuance and treatment of Bankers Acceptances and Commercial Papers saying that where the CP is not secured or guaranteed by bank (clean CP), it needs not be reported as a contingent liability.
As a potential investor in a commercial paper, below are some tips to be familiar with.
Creating CP
A Commercial Paper or CP qualifies as a financing vehicle under these guidelines if:
•the issuer has threeyear audited financial statements, the most current not exceeding 18 months from the last financial year end; and
•the issuer has an approved credit line with a Nigerian bank acting as an issuing and payment agent (IPA), where the bank guarantees the issue.
•Investors in CPs shall be made aware of the identity of the issuer.
CPs shall only be guaranteed and not accepted since the intermediating bank is only a secondary obligor.
When a bank invests in a CP by disbursing its own funds, the transaction shall be reported on balance sheet and treated as a loan. However, if the bank merely guarantees the instrument, it shall be shown off-balance sheet as a contingent liability.
Resale of CPs by banks/discount houses shall be accompanied by adequate documentation which should be provided to examiners on request.
Documentation requirements
The standard documentation requirements for a CP transaction in Nigeria shall include:
•CP raising mandate
•Board resolution to borrow
•Issuing, placing and paying agency agreement
•Commercial Paper note
•Bank guarantee, where applicable
•Investment instruction/investment mandate
•Investment advice
•Custodial agreement
•Information memorandum on the issuer in the case of clean CPs
•Latest rating report from the credit rating agency
•Backstop loan request for guaranteed CPs.
Rating requirements for CP issues
Either the issuer of a CP or the specific issue itself shall be rated by a rating agency registered in Nigeria or an international rating agency acceptable to the CBN. An indicative rating must have been obtained by the issuer at the time of submission of declarations and information to a licensed Securities Depository.
The issuer or the issue shall have a minimum of investment grade credit rating (BBB- or similar rating).
Tenor and rollover
The CP shall be issued for maturities of between 15 days and 270 days, including rollover, from the date of issue.
•Every issue of a CP is therefore, a separate CP.
•The capitalization of upfront interest and discount on maturing Commercial papers into a rollover is not allowed.
Denominations
Investors
BAs and CPs may be issued to and held by individuals, deposit money banks, other corporate bodies registered or incorporated in Nigeria and unincorporated bodies, non-Resident Nigerians and Foreign Institutional Investors.