The Central Bank of Nigeria issued its guidelines on the issuance and treatment of banker’s acceptances and commercial papers in order to ensure uniform practice and correct treatment of Bankers Acceptances (BAs) and Commercial Papers (CPs) by Banks and Discount Houses in Nigeria, as well as to deepen and facilitate the effective and efficient functioning of the Nigerian money market.
These guidelines were issued by the Central Bank of Nigeria (CBN) in exercise of its statutory powers under Section 33 (1)(b) of the Central Bank of Nigeria Act 2007 and will be the focus of this article, particularly in the areas of definition of terms, general conditions for creating BAs & CPs as well as their documentation requirements.
What are the definitions of Bankers Acceptances and Commercial Papers under the CBN guidelines?
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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 utilizing its loanable funds. Instead, funds are provided by investors who are willing to purchase these obligations on a discounted basis.
A CP on the other hand is 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.
What are the general conditions for creating banker’s acceptances and commercial papers?
Bankers Acceptances
(i) Every BA shall have an underlying trade transaction for which the bank should hold the title documents to the merchandise as collateral for the acceptance. These documents shall be available for Examiners’ scrutiny.
(ii) A BA shall be represented by a physical instrument in the form of a draft signed by the drawer and accepted by the bank. All BAs shall be properly executed by the bank by affixing its ‘ACCEPTED’ stamp, signature and definitions of Bankers acceptances and Commercial Papers date on the face of the bill.
These shall be made available for the examiners’ scrutiny.
(iii) The bank shall have a signed agreement, for each acceptance it creates, with the drawer.
(iv) Subject to these Guidelines, 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.
(v) Unless otherwise specifically provided for in these Guidelines or approved by the CBN, the “sale” or “purchase” of services shall not be eligible for BA financing.
(vi) A bank shall not accept a BA that is drawn to finance a sale or purchase of goods, where:
(a) 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);
(b) 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
(c) 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.
(vii) Where the two transacting parties are related corporations, a BA may still be drawn provided that the accepting bank shall take reasonable measures to verify that:
(a) The related corporations are indeed separate legal entities;
(b) 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;
(c) The transaction is to finance cross border trade.
(viii) 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 are not allowed.
(ix) In the event that funds collected from investors are not disbursed to the issuer immediately, such funds shall be treated as deposits.
(x) A BA shall be executed before canvassing for funds from potential investors. Investors in BAs shall also be made aware of the identity of the issuer.
Commercial Papers
(i) A CP qualifies as a financing vehicle under these guidelines if:
(a)the issuer has 3-years audited financial statements, the most current not exceeding 18 months from the last financial year end; and
(b) 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:
(ii) Investors in CPs shall be made aware of the identity of the issuer.
(iii) CPs shall only be guaranteed and not accepted since the intermediating bank is only a secondary obligor.
(iv) When a bank invests in a CP by disbursing its own funds, the transaction shall be reported on the 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.
(v)Resale of CPs by banks/discount houses shall be accompanied by adequate documentation which should be provided to Examiners on request.
What are the documentation requirements for BAs & CPs in Nigeria?
Bankers Acceptances
-In general, a BA may only be drawn on the presentation of a complete set of documents, that includes:
(i)The drawer’s declaration that no other source of finance (including a lease, hire purchase, or factoring agreement) has been or would be entered into in respect of the trade transaction concerned;
(ii)The full set of commercial and/or financial documents, evidencing or acknowledging the trade transaction concerned; and
(iii)A receipt or other documentary evidence of payment, in the case where the purchaser who is drawing the Bankers Acceptance has already made payment to the supplier prior to the creation of the Bankers Acceptance.
-Where the full set of commercial and/or financial documents may not yet be available on the drawing date or where the transaction is only evidenced by a single document, a Bankers Acceptance may still be drawn subject to the following conditions:
(i)At least one supporting document or the single document is presented;
(ii)The document(s) presented contain the following information:
(a) Names and addresses of the parties to the trade transaction;
(b) Specific description of the goods which is the subject of the trade transaction;
(c) Financial value of the trade transaction; and
(d) Terms and conditions for the settlement of the trade transaction.
(iii) The remaining documents should be presented for the accepting bank’s records once they become available.
-The commercial and/or financial documents presented to the accepting bank should be original copies.
-In the event that the original copies of the commercial and/or financial documents are not available or may not be available on the acceptance date, a bank may accept copies of such documents which are produced:
(i) by reprographic systems;
(ii) by or as a result of, automated or computerized systems; or
(iii) as second or carbon copies;
Provided that such documents:
(a) have a serial number; and
(b) are authenticated by authorized signatories, where applicable.
-The original copies of the commercial and/or financial documents should be presented for the accepting bank’s record within seven (7) days for a local and thirty (30) days for a foreign transaction, of the acceptance date, even though the Bankers Acceptance has already been drawn and accepted.
– The accepting bank should clearly indicate it is the drawee of the Bankers Acceptance on the first page of each and every commercial and/or financial document presented.
Commercial Papers
The standard documentation requirements for a CP transaction in Nigeria shall include:
(a) a CP raising mandate
(b) Board Resolution to borrow
(c) Issuing, placing and paying agency agreement
(d) Commercial Paper Note
(e) Bank Guarantee, where applicable
(f) Investment Instruction/Investment Mandate
(g) Investment Advice
(h) Custodial Agreement
(i) Information memorandum on the issuer in the case of clean CPs
(j) Latest rating report from the credit rating agency
(k) Backstop loan request for guaranteed CPs
What are the rating requirements for a CP issuance?
Commercial Papers
-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).
What is the minimum value of a Commercial Paper issue?
A CP shall be issued at the primary market for a minimum value of N100 million and in multiples of N50 million, thereafter.
What is the tenor and rollover of banker’s acceptances and commercial papers in Nigeria?
Bankers Acceptances
(i)The tenor of the BA, including rollover, shall not exceed:
(a)In the case of financing purchases, 365 days after execution of documents and acceptance by the bank.
(b)In the case of financing sales, the shortest remaining credit period extended by the drawer (seller) to the purchaser(s) of the goods.
(c)In the case of importation of capital goods, 365 days and a final rollover of additional 180 days, subject to CBN approval.
Commercial Papers
-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.
What are the provisions of the guidelines on the denominations of banker’s acceptances and commercial papers?
Bankers Acceptances
-The face value of a BA may be equal to but shall not exceed the financial value of the trade transaction stipulated in the supporting document(s).
-The financial value of a trade transaction shall be:
(i) In the case of purchases, equal to the amount of money payable by the drawer of the BA to the supplier for the settlement of the trade, plus other separate payments to relevant parties (e.g. import duties to the Government, insurance premiums to insurance companies, transportation charges to transport companies etc.), if applicable, which are necessary to enable the drawer to accept delivery of the goods; or
(ii) In the case of sales, the amount of money receivable by the drawer
(of the BA) from the buyer for the settlement of the trade.
– Any fees, charges, costs, or payments whatsoever payable or receivable as consideration for after-sales services shall not be eligible for financing under a BA facility.
– Where it is the normal commercial practice in particular types of trade to stipulate in the supporting documents that the financial value is only provisional, the face value of the BA drawn to finance such types of trade may not exceed the provisional financial value.
What are the provisions of the guidelines on drawing multiple BAs on a single transaction?
Where multiple BAs are drawn to finance a single trade transaction, the drawer shall appoint a lead bank to accept the draft on behalf of the other bank.
What are the provisions of the guidelines on limits and the amount of issuances concerning Banker Acceptances and Commercial papers?
The guidelines provide 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.
Aggregate off-balance sheet BAs and guaranteed CPs shall not be more than:
(a) 150 percent of shareholders’ funds unimpaired by losses for a bank; and
(b) 300 percent of shareholders’ funds unimpaired by losses for a discount house.
What are the roles and responsibilities of parties in the issuance of commercial papers?
Issuer
-With the simplification in the procedures for CP issuance, issuers shall now have more flexibility.
-Issuers shall, however, have to ensure that the guidelines and procedures laid down for CP issuance are strictly adhered to.
Issuing and Paying Agent (IPA)
– An IPA would ensure that the issuer has the minimum credit rating as stipulated by the CBN and the amount mobilized through issuance of CP is within the quantum indicated by the guidelines for the specified rating.
– An IPA shall verify that all documents submitted by the issuer viz., copy of board resolution, signatures of authorized executants (when CP is in physical form) are in order. It shall also ensure that it has a valid agreement with the issuer.
-Original documents, or certified true copies thereof, verified by the IPA should be held in its custody.
The Credit Rating Agency (CRA)
– The credit rating agency shall have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for review.
-While the CRAs can decide the validity period of credit rating, CRAs would have to closely monitor the rating assigned to issuers vis-a-vis their track record at regular intervals and intimate the issuing bank of any revision in the rating, particularly when the rating is due for review.
How are commercial papers to be registered under the Guidelines?
All CPs issued in Nigeria shall be registered with a licensed Securities Depository, which shall serve as the depository of the issue.
What do the guidelines say about investors in BAs & CPs and their eligibility to invest?
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.
What are the forms of maintaining BAs & CPs?
Issuers and investors in BAs and CPs may do so in dematerialized or physical form. Issuers and investors are however encouraged to issue and hold BAs and CPs in a dematerialized form.
What are the prescribed disclosure requirements under the CBN Guidelines?
-The bank shall fully disclose the issuer risk in the placement memorandum.
-CPs are only redeemable at maturity, and as such cannot be pre-liquidated.
– An investor in a CP may rediscount the paper with the bank before maturity at new market terms if the bank is willing to purchase the risk.
-Banks shall expressly state in customer advice/correspondence the difference between bank deposits and clean CP investments as well as highlight the underlying agreement that the bank is not obliged to pay at maturity until the issuer redeems the paper.
-Investment instructions in CP shall be received from the customer before the transaction is booked.
-Acceptable channels of communication include:
(i)logged/recorded telephone conversations;
(ii)email from official corporate email addresses ;
(iii) letters signed according to existing mandate ;
(iv) SWIFT;
(iv) Bloomberg, Reuters;
– Every issue of a CP, including renewals, shall be treated as a fresh issue.
What is the penalty for non-compliance with the provisions of the guidelines?
Non-compliance with the provisions of the guidelines will attract appropriate penalties as prescribed in the relevant sections of the Banks and Other Financial Institutions Act (BOFIA) and may also include debarring from the BA or CP market, or as may be prescribed by the CBN from time to time.