The Central Bank of Nigeria (CBN) yesterday unveiled guidelines on the issuance and treatment of Bankers’ Acceptances (BAs) and Commercial Papers (CPs).
The move, the CBN said, was to ensure uniform practice and treatment of BAs and CPs by banks and discount houses in the country, which according to the apex bank, will “deepen and facilitate the effective and efficient functioning of the Nigerian money market.”
As defined by the CBN, a BA is a “draft drawn on and accepted by a bank, unconditionally ordering payment of a certain sum of money at a specified time in the future to the order of a designated party. Since the instrument is negotiable, title to it is transferred by endorsement. It is a marketable instrument and allows a bank to finance its customers without necessarily utilising its loanable funds. Instead, funds are provided by investors who are willing to purchase these obligations on a discounted basis.”
Similarly, it defined a CP as “an unconditional promise by a person to pay to the order of another person a certain sum at a future date. Such an instrument may or may not carry the bank’s guarantee. Where the bank guarantees the CP to make it more marketable in the money market, the instrument acquires the force of a BA and the bank incurs a contingent liability.”
“Where the CP is not secured or guaranteed by the bank (clean CP), it needs not be reported as a contingent liability,” the CBN added.
Under general conditions for creating BAs, the CBN stated that “a BA may only be drawn on and accepted by a bank, pursuant to an acceptance credit line, to finance the drawer’s business-related activity in relation to the purchases from or sale of goods to another person who may be a resident or non-resident, evidenced by proper and adequate documentation.”
It further stated that the “sale” or “purchase” of services shall not be eligible for BA financing, adding that “a bank shall not accept a BA that is drawn to finance a sale or purchase of goods, where: The two parties to the trade transaction are part of a single legal entity (e.g. Production Department and Marketing Department of one company or one branch and another branch);
“ The two transacting parties are sole proprietorships operated or owned by the same individual or where the proprietors are different individuals related to each other (parent/child or spouse); or
“The two transacting parties are partnerships in which the partners are the same individuals, or the majority of the partners are common, or one or more common partners own the majority share in the partnerships.”
It, however, stated that where the two transacting parties are related corporations, a BA may still be drawn if the accepting bank shall take reasonable measures to verify that “the related corporations are indeed separate legal entities; the trade transaction between the two related corporations was undertaken at arm’s length and there was a genuine transfer of title to the goods concerned, evidenced by proper and adequate documentation; the transaction is to finance cross border trade (and) extension of BA tenure or creation of new BA to repay the financing created by existing BA using the same commercial and/or financial documents is not allowed.”
Equally, under general conditions for creating CPs, the CBN stated that a CP would qualify as a financing vehicle under the guidelines if “the issuer has three years 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.”
In addition, the CBN stated that “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.”
Furthermore, under rating requirements for CP issues, the apex bank stated that “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),” it added.
Regarding tenor and rollover as well as limits/ amount of issue of BAs, the CBN stated that the tenor of the BA, including rollover, shall not exceed “in the case of financing purchases, 365 days after execution of documents and acceptance by the bank; in the case of financing sales, the shortest remaining credit period extended by the drawer (seller) to the purchaser(s) of the goods and “In the case of importation of capital goods, 365 days and a final rollover of additional 180 days, subject to CBN approval.”
On the tenor and rollover as well as limits/ amount of issue of CPs, the CBN stated: “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” (and) the capitalisation of upfront interest and discount on maturing Commercial papers into a rollover is not allowed.
“CP shall be issued at the primary market for a minimum value of N100 million and in multiples of N50 million, thereafter,” adding that “off-balance sheet BAs and guaranteed CPs extended to a single obligor shall not exceed 30 percent of a bank’s or discount house’s shareholders’ funds unimpaired by losses.”
According to the CBN, “aggregate off-balance sheet BAs and guaranteed CPs shall not be more than: 150 per cent of shareholders’ funds unimpaired by losses for a bank; and 300 percent of shareholders’ funds unimpaired by losses for a discount house.”