Introduction to Commercial Papers

In recent times, companies seeking to raise finance from diversified sources to address either their working capital or short-term financing needs may do so by issuing equity or debt securities. Debt securities are financial instruments representing a debt of the Issuer, it contains a promise by an Issuer to repay a defined amount to an investor (the holder of the instrument), on or by a specified date. These debt securities when issued can have different characteristics which include, interest bearing or discount debt instruments, tenor, listed or unlisted, secured or unsecured. Examples of debt securities include bonds, notes, commercial papers, bankers’ acceptance, etc.   

Commercial papers (CP) were introduced in Nigeria in 1962 to finance the export-marketing operations of the then Northern Marketing Board. Under that arrangement, the marketing boards met their cash requirements by drawing ninety-day (90 day) bills of exchange on the marketing boards. The bills were then discounted with the commercial banks participating in the scheme[1].

Commercial papers are now the most common form of short term debt instruments issued by companies or organizations for the purpose of obtaining funds to meet short term obligations, the term ‘short-term’ in the context of debt securities means that it has a term of less than a year. Commercial papers usually have a maturity rate between a minimum of 15 days and a maximum of 270 days[2]. For many medium to large creditworthy issuers, it is a competitive alternative to bank loans and a way of raising working capital at short-term interest rates which offers competitive returns to investors in compensation for the issuer’s credit risk. Commercial papers may be interest bearing or issued at a discount to face value, which is determined by the issuer.

  • Regulations governing the Issuance of Commercial Papers in Nigeria

By virtue of the Central Bank of Nigeria (CBN)’s circular to all Deposit Money Banks and Discount Houses on the Mandatory Registration and Listing of Commercial Papers dated 12 July 2016,  deposit money banks and discount houses may only deal in CPs that are registered, quoted or intended for quotation on Authorised Securities Exchanges, whether acting in the capacity of an issuer, guarantor or Issuing, Placing, Paying and Collecting Agent (IPCA), Collecting and Paying Agent (CPA), etc. The issuance of registered CPs is presently regulated through the:

  1. CBN Guidelines on the Issuance and Treatment of Bankers Acceptances and Commercial Papers dated 18 November 2009 and reissued on 11 September 2019 (CBN Guidelines); and
  2. FMDQ Commercial Paper Registrations and Quotation Rules August 2019 (FMDQ Rules).

Accordingly, Issuers who wish to register and quote their commercial paper on the FMDQ must comply with the FMDQ Rules.

It is important to note that other major authorized securities exchanges in Nigeria namely, the Nigerian Stock Exchange and the National Association of Securities Dealers OTC Securities Exchange have over the years published proposed applicable regulations for commercial paper issuance which are NSE Listing Rules and NASD Proposed Rules for Admission of Commercial Papers on NASD OTC Securities Exchange respectively. As stated, these rules are proposed and are not currently in effect as at the date of this Article.

  • Structure of Commercial Papers

Tenor and Minimum Issue Size

As earlier stated, CPs may be issued for tenors ranging between a minimum of fifteen (15) days and a maximum of two hundred and seventy (270) days, inclusive of any rollovers from the date of issue. The minimum issue value for commercial paper is N100million and in multiples of N50million thereafter.[3]

Programme and Discreet Issue

As provided in the FMDQ Rules, CPs may be registered as a Discreet Issue (a single CP issuance which is not established under a Programme) or under a Programme through a shelf registration.

In the case of a CP programme, the Issuer has the discretion to issue several series/tranches of CPs with separate maturity dates or ‘re-open’ existing CP issues (where there is no change in the maturity date). CP Programmes are valid for a period of three (3) years but may be extended in accordance with the provisions of the FMDQ Rules.[4]

Although the FMDQ Rules provide that CP programmes are valid for a certain period, the commercial paper programme may be renewed no earlier than three (3) months to the expiration of the validity period by the issuer/promoter upon filing of necessary documentation prescribed by FMDQ from time to time. Upon the expiration of the validity period recommended by the FMDQ, the programme shall no longer qualify for a renewal and a fresh programme registration process is required to commence.[5]

Secured and Unsecured Commercial Papers

Commercial papers are usually unsecured debt instruments and are therefore not required to be backed by collateral. Only corporate bodies with excellent credit ratings from a SEC-recognized credit rating agency will be able to issue commercial papers[6]. Unsecured CPs (also referred to as Clean CPs) are also known as traditional commercial papers. These CPs are issued without any collateral and are not backed by guarantee or other credit enhancement and hence, the issue is based on rating by a recognized rating agency in accordance with the CBN Guidelines and the FMDQ Rules. CPs that are unsecured can only be sold to QIIs and Els.[7]

Secured commercial papers also known as guaranteed or asset-backed commercial papers are collateralized by other financial assets or other securitisation mechanisms as may be permitted by FMDQ. CPs may be guaranteed by a corporate entity (such as CBN-licensed banks, development finance institutions, credit guarantee agencies and corporations) or the Federal Government of Nigeria. Unlike unsecured/clean commercial papers, this type of CPs can be issued to all categories of investors.[8]

Single Currency Issuance and Multicurrency Issuance

As stated in the FMDQ Rules, CPs may be issued in a single denominated currency or in a multicurrency. However, for such multicurrency commercial paper programmes to be registered on the FMDQ, such issuance is required to be supported by a foreign currency rating provided by a SEC-recognised or registered rating agency. Furthermore, such multicurrency commercial papers must be denominated in the currency specified in the applicable pricing supplement.[9]

Other Considerations

CPs are issued and held in a dematerialised form with a Central Securities Depository recognized by FMDQ; and CPs are only redeemable at maturity, which means that they cannot be pre-liquidated. Furthermore, CPs are issued option-free and thus options (call or put) are not permitted.[10]

  • CBN Guidelines

The CBN Guidelines require that, to qualify as a financing vehicle, a CP issuer must:

  1. have 3 (three) years audited financial statements, with the most current not exceeding 18 (eighteen) months from the last financial year end; and
  2. have an approved credit line with a Nigerian bank acting as an Issuing and Paying Agent[11].

As part of the requirements under the CBN Guidelines an Issuer or the specific issue itself under a CP Issuance shall be rated by 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 it is submitting its information and declarations to a licensed securities depository[12]. The Issuer or the Issuer shall have a minimum of investment grade credit rating (BBB- or similar rating)[13].

In addition, the CBN Guidelines require that guaranteed commercial papers extended to a single obligor by a bank shall not exceed 30% of a bank’s shareholders’ funds unimpaired by losses; and a bank’s aggregate guaranteed commercial papers shall not be more than 150% of shareholders’ funds unimpaired by losses[14].

FMDQ Rules

The FMDQ Rules in addition to the requirements prescribed by the CBN further prescribe additional requirements for a commercial paper issuer or promoter, amongst others:[15]

  1. it must be duly incorporated under Applicable Law;[16]
  2. it must have been incorporated for a period of not less than 5 years and must have been in operation for not less than 3 years prior to the date of application for registration of the programme;
  3. it must have shareholders’ funds (unimpaired by losses) not less than NGN500 million as evidenced by its latest audited accounts, not being later than 12 (twelve) months from the date of submission of the application to register the programme, and shall be maintained at or above that level for the entire period that the commercial paper remains on the FMDQ; and
  4. where it does not meet the requirements in paragraphs (b) – (c) above, the prospective commercial paper issuance must be backed by a guarantor or a credit enhancement provider that meets those requirements and such other requirements as may be prescribed by FMDQ from time to time;

The FMDQ Rules also provide for similar credit rating requirements as provided in the CBN Guidelines and stated above[17].

Finally, the FMDQ Rules recognise that commercial papers may be issued directly or through an SPV; however, where the commercial papers are issued through an SPV, the promoter or sponsor of the SPV will be required to meet the eligibility criteria under the FMDQ Rules[18].

Specifically, where the Issuer of a CP is an SPV, established for the purpose of issuing asset or mortgaged back CPs, the SPV shall be required to have a minimum of three (3) years credit history of the underlying assets, evidence of predictable cash flows of the underlying assets or mortgages and such other provisions as may be prescribed by FMDQ from time to time.

Parties to a Commercial Paper Issuance Transaction

Typically, parties to a registered CP issuance include the issuer, issuing houses, solicitor, auditors, underwriters, deposit money banks etc. Their respective roles are highlighted below:

  1.  Issuer: This is the entity (which may be a public or private company) that intends to raise short-term finance through the issuance of CPs. The CP can be issued by corporates that meet the issuer and issue eligibility criteria and other documentation and disclosure requirements prescribed in the FMDQ Rules. These requirements under the FMDQ Rules as well as the CBN Guidelines have been discussed in section 4 above.
  • Promoter: This is a legal entity with substantial interest in the establishment of an issuer which was incorporated as a Special Purpose Vehicle (SPV). A promoter may also be referred to as a “parent company” which typically holds significant ownership and control of the SPV[19]. Where the issuer is an SPV, the promoter will be deemed to have the same responsibilities of the issuer as required by the FMDQ.
  • Issuing and Placing Agent (IPA): This is a non-bank financial institution which sponsors the registration and quotation of the CP programmes and issuance as well as the placement of commercial paper with investors at the primary issuance[20]. The IPA must be an FMDQ licensed Registration Member (Quotations)[21]. Where an IPA sponsors a CP issuance, the issuer will have to appoint a bank to act as Collecting and Paying Agent.
  • Collecting and Paying Agent (CPA): This is a deposit money bank appointed by an Issuer or Promoter to perform the functions of collecting and paying funds from/to investors on behalf of the Issuer or Promoter where the CP is  sponsored by an IPA[22].
  • Issuing, Placing, Paying and Collection Agent (IPCA): This is a CBN-licenced bank sponsoring the registration and quotation of the CP programmes and issuance on the FMDQ, placement of the commercial papers with investors at the primary issuance, as well as performing the functions of collecting and paying funds from/to investors on behalf of the issuer/promoter. The IPCA must also be an FMDQ licensed Registration Member (Quotations).
  • Credit Rating Agency: A credit rating agency is a company that assigns credit ratings, which rates a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations and debt instruments bur not of individual consumers. The debt instruments rated by credit rating agencies include government bonds, corporate bonds, preferred stock and collaterised securities. In Nigeria, there are three (3) major Securities and Exchange Commission (SEC) recognized rating agencies namely Agusto and Co, Datapro Limited and Global Credit Rating.
  • Central Securities Depository: This is a specialist financial institution, licensed by the SEC which holds commercial papers either in certificated or uncertificated (dematerialised) form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. Depositories allow brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. The depository acts as custodian of the CPS. As this process is usually done electronically, it is much faster and easier than where physical certificates had to be exchanged after a trade had been completed. In Nigeria, there are two (2) licensed securities depository which are the Central Securities Clearing System (CSCS) and the FMDQ Depository.
  • Guarantor/Underwriter: This is a company, usually an investment bank, that evaluates and assumes the issuer’s risk for a fee. The fee is often a commission, premium, spread, or interest. Where an underwriter or guarantor is required, an underwriting agreement is usually executed between the issuer and the underwriter.
  1. Solicitors: The solicitor advises the issuer and ensures that the issuer is legally capable of issuing the commercial papers and complies with the applicable laws and regulations relating to the issuance.
  • Auditors: The auditors are responsible for providing transparent, informative and accurate financial report which is essential for investors to make informed decisions in relation to the issuance.
  • Investors: Qualified Institutional Investors[23] (QIIs) and Eligible Investors[24] (EIs) can invest in commercial papers. It is the role of the IPCA/IPA to ensure that QIIs and EIs meet the qualifying criteria set out in the FMDQ Rules. Whilst guaranteed commercial papers may be sold to all investors (QIIs, EIs and any other investor), clean CPs shall only be sold to QIIs and EIs upon the execution of a declaration attesting to the Investor’s awareness of the risks involved in investing in the clean CPs.
  • Registration and Quotation of Commercial Paper

Registration of a CP is the administration of the review and approval processes in respect of CP programmes, prior to the issuance of such CPs to the Investors. Quotation is the admission of issued CPs to the FMDQ Exchange platform for trading.

In Nigeria, in order to be quoted on the FMDQ, the commercial papers shall first be registered in accordance with the FMDQ Rules.[25] An application for registration and quotation of the commercial papers is required to be sponsored by a duly licensed FMDQ Registration Member (Quotations).

As earlier stated CPs may be registered as a discreet issue or through a programme or shelf registration. A programme means that the commercial papers are issued in more than one series while a discreet issue means that the commercial papers are issued in just one series and not under a programme. Where the commercial paper is issued under a programme, the issuer is required to file the applicable supplemental documents which provides details of each series/tranche.

The FMDQ Rules provide for the following documentation and disclosures from the issuer and promoter in connection with the registration of commercial paper programme on its platform:

  1. FMDQ Application Form;
  2. memorandum and articles of association or other relevant constitutional document;
  3. certificate of incorporation or its equivalent;
  4. particulars of directors and shareholders;
  5. 3 (three) years audited financial statements, with the most recent not exceeding 12 (twelve) months from the date of submission of the application for registration;
  6. most recent unaudited interim reports and accounts;
  7. external auditor’s comfort letter on the issuer/ promoter;
  8. corporate profile of the issuer/ promoter;
  9. documentation providing information and details of any charges/ encumbrances on cash flows;
  10. comprehensive schedule of current debt profile;
  11. details of any litigations/ claims certified by the external solicitor;
  12. evidence that the commercial paper issuance does not exceed the limit of its borrowing powers;
  13. for non-bank corporate issuers or promoters, a bank reference on the issuer or promoter and a credit information report on the issuer or promoter obtained by a CBN licensed credit bureau; and
  14. evidence of payment of application fee.

  • Standard Documentations Required in a CP Issuance
  • The following are the typical documentation for a CP Issuance:

    1. Board resolution : the resolution of the Board of Directors of the Issuer authorising the CP issuance and stating the  amount to be raised, which in case of a programme is the Programme Limit. The amount raised through the CP issuance shall not exceed the amount approved by the Board of Directors of an Issuer [26].
    2. Information memorandum: this is a document which serves to provide prospective investors with information on the issuer and the commercial paper sought to be issued under the programme or discreet issuance.
    3. Pricing supplement: with respect to each series/tranche, containing details of the issue and material changes, if any, in the information provided in the Information Memorandum.
    4. Agency Agreements: this is an agreement between the issuer and the agents (IPA and CPA or the IPCA), which highlights each party’s duties and obligations. The FMDQ Commercial Paper Registration and Quotation Template Guide (FMDQ Template Guide) provides an indicative template of the general contents of the agency agreement and includes extensive duties and obligations of the issuer and the IPA/ IPCA, among other things.
    5. Deed of Covenant: This is a deed poll executed by the issuer providing the rights of the Investors and the terms and conditions of the commercial paper.
    6. Deed of guarantee: where commercial paper is guaranteed this is an agreement between the Issuer and the guarantor of the Issue. The guarantee agreement shall clearly state the obligations of the issuer to be guaranteed by the guarantor and whether the guarantee is a full or partial, conditional or unconditional. Under the CBN Guidelines, where a bank invests in a commercial paper 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 commercial paper, it shall be shown off-balance sheet as a contingent liability.[27]
    7. Underwriting Agreement: Means an agreement to buy all or part of the new Issue of CPs to be offered/held for sale with a view to a resale and not as a form of investment. There are two basic types of underwriting:
      1. Firm underwriting: Where the Issuer/Promoter sells the entire Issue to the underwriter, who then attempts to resell the securities. The Issuer/Promoter receives the agreed amount and all the risks associated with selling the securities are transferred to the underwriters
      1. Standby underwriting: Where the underwriter is legally bound to take and pay up to the underwritten percentage only if the Issue is not fully subscribed.
    8. Auditor’s comfort letter: is a written statement issued by an independent auditor, stating that there is no inaccurate or misleading information in the prospectus of the issuer. A comfort letter only contains an opinion, and it is not an assurance or guarantee that the issuer being reported upon will remain financially viable.
    9. Solicitor Opinion on the Issue: this is the Legal opinion by the Solicitor expressing legal conclusions about, or legal analysis of, a transaction or issue. It only contains an opinion and is not an assurance of the enforceability of the transaction documents.
    10. Credit rating: a credit rating of the issuer issued by a SEC-recognised or registered rating agency which rates a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default.

    In addition to the general overview of the standard documentation in a CP issuance as briefly discussed above, the CBN Guidelines[28] and the FMDQ Rules[29] provides for documentation requirements for the issuance of a commercial paper which include:

    1. the commercial paper raising mandate;
    2. investment instruction/ investment mandate;
    3. investment advice;
    4. a backstop loan request for guaranteed commercial papers.
    5. details of repayment sources/ funding plan for the issue;
    6. a general undertaking in the form provided in the FMDQ Template Guide;
    7. a declaration of compliance by the issuer or promoter in the form provided in the FMDQ Template Guide;; and
    8. evidence of payment of all relevant fees.


    Corporations seeking diversed funding options, may consider exploring the commercial paper market which can provide a solution to the short-term financing needs of such corporation. Commercial Papers are becoming more rampant in the Nigeria debt capital market and recent reports show an oversubscription at every issuance.

    The information and opinions in this publication are provided for general information only. They are not intended to constitute legal or other professional advice. If you would like additional information, please contact the author at [email protected]

    © All Rights Reserved. Sefton Fross is a leading full-service law firm in Nigeria internationally recognised for its expertise in corporate, commercial and mergers and acquisitions.

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