Firms Urged to Tap Equity Funds to Reduce Financing Cost

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Goddy Egene
Stakeholders in capital market have urged companies to embrace equity capital raising to fund their operations, in order to reduce financing costs and increase returns to shareholders.

Listed companies have access to raising funds from the capital market through offering of new shares (equity) or issuing bonds (debt capital).

Equity fund raising is relatively cheaper as the cost is below 10 per cent, the cost of debt raising is above 10 per cent.
However, due to low demand for equities, most companies have resorted to debt capital raising.

But findings have shown that few companies that raised additional funds through equities capital, through rights issues, recorded reduced financing cost.
Owing to this, some investors have called on more companies to embrace raising funds from the equities market.

“The equities market is yet to fully recover from the 2008 and 2009 down turn as most investors, who witnessed heavy losses are yet to return to the market.

“For this reason the market has not been recording many equity offerings over the years. But it is very advisable that companies go for equity capital which is cheaper than debt capital,” a stockbroker said.

Also speaking, a shareholder, Mr. Moses Igbrude, said most of the companies are scared of poor response from investors, hence they are not coming to issue fresh shares to raise cheaper funds.
According to him, irrespective of investor apathy, companies that have good track records in terms of financial performance, can still succeed in raising equity funds from shareholders.

“It is cheaper and more preferable for us shareholders if companies raise equity funds. That equity capital will reduce the reliance of companies on bank loans and debt capital which are relatively costlier.

“When equity capital is injected either via rights issue or public offering of shares, it reduces the cost of financing and enhances shareholders’ value,” Igbrude said.

He explained that companies such as Unilever Nigeria Plc, Guinness Nigeria Plc, UAC of Nigeria Plc, Flour Mills of Nigeria Plc, among others that raised equities in 2017 and 2018 have witnessed significant reduction in cost of finance afterwards.

For instance, Flour Mills of Nigeria Plc raised N40 billion last year and its finance cost reduced by 34 per cent to N16.5 billion in the nine months ended December 31, 2019, from N25.2 billion of the same period the previous year.

Guinness Nigeria Plc witnessed a decline of 54 per cent to N3.443 billion for the year ended June 30, 2018, from N7.527 billion in 2017, following a rights issue of N39 billion the previous year.

Instead of embracing equities capital raising, some companies have developed more interest for commercial paper(CP). Nigerian Breweries Plc last month accessed the market N15 billion in the first and second series of its N100 billion commercial paper to support its short term funding. The series 1 which is for 90 days has an effect yield of 11.59 per cent and will mature on July 22, 2019. On the other hand, the Series 2, which is for 182 days, has an effective yield of 14.43 per cent. It will mature on October 22, 2019.

Similarly, Flour Mills of Nigeria, which had raised equity of N40 billion last year, in February raised N6 billion in the sixth series of its N100 billion Commercial Paper(CP) programme to support its short-term funding needs.