Commercial paper issuers face rollover challenges as investors find safe haven in G-Secs

• Issuers of commercial papers also shifting towards bank borrowings due to lower rates
• ICRA Lanka believes commercial paper market may have shrunk in 2020 first half 

Commercial paper issuers in Sri Lanka found themselves in a fix at the height of the pandemic, as they found it difficult to find investors to roll over their debt instruments as investors had parked their funds in low-risk assets such as government securities, ICRA Lanka observed. 

People flock to safe haven assets such as government securities (G-Secs) during times of crises and sometimes convert their investments into cash as they want to minimize losses and prefer to remain liquid as cash becomes king during such extremely times.   

“The commercial paper issuers faced major challenges when it came to roll over of debt at the height of the crisis, as investors moved funds to low risk assets such as G-Secs,” the rating agency said.

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. 

Meanwhile, as market interest rates have fallen sharply so far this year, ICRA Lanka has observed another development where the issuers of commercial papers shift to bank borrowings. 
“…issuers have also moved towards securing low-cost, long-term funding from banks, as opposed to raising funds through commercial papers,” stated ICRA Lanka, a part of Moody’s Investors Services. 

As a result, the rating agency believes the commercial paper market in Sri Lanka might have shrunk during the first half of 2020 in comparison to end-2019. 

According to the latest data available up to June 2020 provided by the licensed commercial and specialised banks and compiled by the Central Bank, cumulative commercial paper issues have fallen from Rs.3.4 billion in December 2019 to Rs.2.6 billion in June 2020. 

However, the figure had gone slightly up from May’s Rs.2.3 billion. 

Meanwhile, the total outstanding amount of commercial paper issues has increased from Rs.1.4 billion in end-December, 2019 to Rs.2.2 billion by the end-June this year.