Guinness Nigeria Plc, last Thursday announced it is establishment a N10 billion commercial paper (CP). It also said it had plans to launch the first tranche of the issue under the programme on or before May 8th, 2015.
The commercial paper according to the outgoing MD/CEO of Guinness Nigeria, Mr. John O’Keeffe also claimed this was the first CP programme to be established following the new CBN guidelines covering commercial paper issuance in Nigeria. The company is expected to raise about N10billion with N5billion being the first part of the issuance programme.
But why is Guinness issuing a CP and how does that affect shareholders? A commercial paper by definition is basically the company borrowing money from the public to finance its short term financial needs. So, rather than take a bank lending that may require collateral and perhaps cost more, the company is seeking to finance its operations by borrowing directly from the public. This moves makes sense for a number of critical reasons . Let’s outline four.
1. Working capital – Guinness currently has a negative working capital of N10billion. The amount includes short-term external loans as well as amounts owed to trade and other creditors. Ensuring working capital levels are maintained at the cheapest available cost is important for the company.
2. Account payables – Guinness also reveals in its latest results that it had a total trade and other receivables of about N20billion. Out of that amount N10billion is owed to trade suppliers whilst another N6billion is owed to other providers of services to the company. Guinness like its competitor Nigerian Breweries operates a form of credit financing of its operations relying on credit services from their suppliers and service providers. However, they do need to service some of those obligations and ensuring another source of funding is available for them is crucial. ,
3. External loans – Guinness also owes a total external loan of about N38.1billion. N18.7billion of that money is owed to short-term creditors piling more pressure on the company to raise cash elsewhere. The total loans is also now 84% of equity suggesting they may have hit a borrowing limit, at least for now. Paying off some of the overdrafts with its commercial paper funding also helps reduce its debt to equity ratio. The subordinate nature of commercial papers gives the company’s capital structure the flexibility it needs
4. Good returns – Despite seeing margins drop massively over the years, Guinness could probably still post a return on asset of over 10%. With indications that the CP may be priced at between 14 and 16% discount, a high return on assets gives shareholders comfort that the company can generate enough return to cover debt cost.
Shareholders will be a little worried considering the additional cost this issuance might bring to bottom line. An added layer of interest cost is not want they perhaps want at the moment. Except, off course they repay their short term loans with the cash flow from the CP (assuming the external loans cost more to service).
Disclosure – Nairametrics and the author of this article does not own shares in Guinness Nigeria Plc and does not plan to buy shares in Guinness Nigeria Plc in the next 72 hours. The author of this article wrote it themselves, and did not write this article on behalf of Guinness Nigeria Plc, its associates or representatives. The article is purely their opinion