Commercial paper market recovers to pre-COVID-19 levels

• Cumulative value of total commercial papers in issue at Rs.3.3bn by end-August, against Rs.3.4bn in Jan.

Money raised through commercial papers has reached near pre-pandemic levels in a short span, since the new issuances sunk amid the concerns over rollover challenges faced by the issuers and their likely preference towards cheaper bank borrowings over the debt instrument. 

According to the latest data, the cumulative value of total commercial papers in issue reached Rs.3.3 billion by end-August, just shy of the Rs.3.4 billion at the beginning of the year. 

The figures were based on the information provided by the licensed commercial and specialised banks in Sri Lanka. By end-June, the amount fell to Rs.2.6 billion, prompting questions if the commercial paper market had shrunk in Sri Lanka. Meanwhile, the total outstanding commercial papers issued by end-August, was Rs.2.1 billion, up from Rs.1.4 billion at the beginning of the year. 

Few months ago, during the pandemic, Sri Lanka’s commercial paper issuers were facing problems over how to find investors to rollover their debt, as the latter had flocked into safe haven assets such as government securities. 
“The commercial paper issuers faced major challenges when it came to rollover of debt at the height of the crisis, as the investors moved funds to low-risk assets such as G-secs,” ICRA Lanka, a rating agency, which tracked the market behaviour during the first six months, said in a report in August. 

Meanwhile, during the period, some issuers also shifted to bank borrowings, to take advantage of the historically low rates for commercial borrowings. 

Last week, Sri Lanka’s prime lending rate, the rate at which the large corporates secure short-term bank funding, fell to a new low of 5.72 percent, while the rate offered to small businesses also fell by about 4.0 percent during the nine months to 8.82 percent, the lowest on record. 

Business entities use commercial paper as an instrument to borrow from other entities to meet short-term financing requirements such as working capital. 

These are unsecured debt and are typically issued by large corporates, often with a good credit rating at a discount from the paper’s face value and are often bought by banks, other financial institutions, money market funds and wealthy individuals. 

The issuer or the borrower then settles the paper at its maturity by paying the face value.