Commercial papers: short-cut to funds

A new money market instrument -- commercial paper -- is gaining popularity among companies owing to its low cost and easy access.

At least four companies have so far raised Tk 345 crore through six commercial papers since its introduction in the country in October 2013, with half of the funds collected in just the last four months. 

Many companies are interested in CP as it is a low-cost alternative to bank loans, said Ali Reza Iftekhar, managing director and chief executive of Eastern Bank that introduced the short-term debt instrument in Bangladesh.   

EBL has so far arranged Tk 100 crore through this channel for ACI and Shanta Properties and has another Tk 200 crore worth of deals in the pipeline, he added.

Companies issue commercial papers, a short-term unsecured debt instrument, to raise funds from subscribers to meet their interim financing needs. Financial institutions act as arrangers and agents for the issuers.

Maturities on commercial papers rarely range any longer than 365 days, and the debt is usually issued at a discount, reflecting prevailing market interest rates.

Since it is not backed by collateral, only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

With CP, companies can now get funds at 10-11 percent interest against the normal lending rate of 13 percent, which explains their rising popularity, according to Anis A Khan, managing director of Mutual Trust Bank that already arranged Tk 95 crore this way.

Furthermore, since less documentation is needed, corporates can access the funds quicker through a CP than by way of the traditional loan method, said Mohammad Jahangir Alam, head of structured finance at City Bank that has arranged a Tk 75 crore-CP for ACI and has Tk 150 crore of deals in the pipeline for the next two months.

For instance, Bengal Plastics, a leading plastic goods maker, has recently raised Tk 50 crore through a CP, as it could get the funds promptly, said Md Jashim Uddin, vice-chairman of Bengal Group of Industries.

Commercial paper would be a promising product for Bangladesh due to its unique features, SK Sur Chowdhury, deputy governor of Bangladesh Bank said in November last year.

For many corporations, borrowing short-term money from banks is often a laborious and annoying task. The desire to avoid banks as much as possible has led to the widespread popularity of CP, according to industry people. 

The Reserve Bank of India introduced CP in 1990 in a bid to enable highly-rated corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors. RBI also issued a guideline in this regard.

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