Ruan Jooste’s Rants and Cents: Commercial paper’s worth and the paper it is written on

This means that if the proposed exemption notice survives legislative muster and public scrutiny, then local governments and parastatals like Eskom and Transnet can issue debt instruments like commercial paper, in addition to their own longer-term bonds

Eskom Bellville Head Office. Picture Henk Kruger/African News Agency (ANA)

Published Jul 30, 2023


Commercial paper is a type of debt instrument issued by funders, which are not necessarily registered banks or authorised credit providers, to provide finance to companies to cover their short-term operational needs, or as the bean counters call it – working capital. The money raised from commercial paper can be used for anything from payroll and inventory finance to petty cash, and big business often prefer commercial paper to unsecured bank loans, which tend to carry higher interest rates. And in the current high inflationary economic environment, that is a vital consideration for going concerns.

Now all this corporate mambo jumbo might not matter that much to retail investors or retirement fund members, apart from the security being of low-risk. This means that the typical holders of the security like pension funds and unit trusts – which can purchase it as listed securities on an exchange or bi-laterally negotiate returns over-the-counter – have increasingly included it in the prudent part of their diversified portfolios with similar fixed-term investments, similar to sovereign government bonds. That being said, local residents and ratepayers might appreciate the effort more as this story unfolds.

Unlike other debt instruments like bonds, the maturity span of commercial paper is much shorter, which according to current Prudential Authority (PA) regulations, is around five years. The prescribed duration has always been significant because any debt with a maturity exceeding that number of years faced much heavier scrutiny by a wider scope of policymakers and regulators. But recently the PA had proposed amendments to the Commercial Paper (CP) Exemption Notice, 1994, to further enhance the safety and soundness of the shorter-lived commercial paper market. This is still all good news for investors and members.

Basically, CP Notice relates to the exemption of certain provisions of the Banks Act, which disallows financial firms that don’t conduct the “business of a bank” or are registered as a “bank” with the South African Reserve Bank, to participate in activities that fall outside the scope of the legal definition of a bank in the applicable legislation. In short, the regulations allow non-banks to trade in commercial paper under certain conditions.

According to Dawid de Villiers, a partner and financial services legal specialist at Webber Wentzel, among the notable proposed amendments is an enhancement to the definition of commercial paper. “This would explicitly reduce the term structure of commercial paper issuances to 364 days, aligning with international practice,” he said.

The draft amendment also introduced the requirement for all commercial issuers to have net assets exceeding R100 million at a point in time no earlier than 18 months before the proposed issuance, as certified by the issuer’s auditors, and required new issuers to obtain regulatory approval.

There are a few other red-tape hoops planned for private sector issuers to jump through to make this all work, and make the world a better place. So the intent is to set the bar even lower for the presumption of risk, as I said at the start of my story, right? Well, let’s hope so. De Villiers said that the proposals would make the process more transparent, and bring definitions and prescriptions that were penned almost 14 years before the financial crisis in line with global norms.

Since the credit crunch, when securitised debt obligations of a few prominent investment bankers gave central banks across the world a serious run for their money, much-needed reform has transpired across international monetary and fiscal policies, to safeguard investors and institutions in future. We are a bit late to the party, but no harm, no foul if nothing is found in such private corporate activity.

The theory of low risk does fall flat on its face following the proposal of including state-owned enterprises and municipalities to the list of entities exempt from applicable sections in banking laws. This means that if the proposed exemption notice survives legislative muster and public scrutiny, then local governments and parastatals like Eskom and Transnet can issue debt instruments like commercial paper, in addition to their own longer-term bonds (which are different from bonds issued by national government by the way), to raise finance for operational and capital expenditure. In a perfect world, this would bridge the gap between the collection of rates and taxes and the carrying the cost of service delivery. The intent is noble.

But most of our municipalities are already bankrupt, and their bond market is as clear as mud, so I doubt that the new capital raising concession will make any difference to their cash flow woes. And despite SOEs like Eskom and Transnet bonds being traded on the JSE, listing requirements are a lot less stringent than that of the equity market, not to mention the national government covering the interest payments on these bonds with bailout after bailout. So debt financing is clearly not these two organs of state’s strong suit. And I highly doubt commercial paper will be any different. It just doesn’t fit the low risk narrative for investors. So there will be no short-term reprieve for paying state salaries and service delivery I’m afraid. But nice try!