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Firms with N1.18 trillion Cash Hoard Seen as Vital to Economic Rebound

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Nigerian blue chip companies holding big cash balances after hoarding cash during the pandemic are seen as vital to driving private sector capital expenditure which should help in prolonging the economic rebound.

Companies have been taking advantage of low interest rates to borrow more money, which has helped boost both cash — and debt levels — for blue chips.

The country’s nonfinancial companies including Dangote Cement and MTN Nigeria, had a record N1.18 trillion in cash in their balance sheets as of the end of the second quarter (Q2, 2021), according to data gathered by MoneyCentral.

Banks and non-financial firms are usually excluded from the corporate cash list because they are required to hold a lot of money in cash due to the nature of their daily operations.

The second quarter totals are up 38.28 percent from N808.94 billion at the end of 2020.

Cash is king and the life blood of any business because it creates buffers in times of escalating uncertainties as seen during the coronavirus pandemic that disrupted the demand side of the market.

It insulates firms from the risk of the financial market and ensures the ability to fund projects, pay dividends to shareholders, and meet financial obligations.

Nigeria’s Gross Domestic Product (GDP) grew by 5.01 percent (year-on-year) in real terms in the second quarter of 2021, marking three consecutive quarters of growth following the negative growth rates recorded in the second and third quarters of 2020.

The GDP numbers came in slightly better than MoneyCentral’s leading economic indicator model predicting 3.8 percent growth in Q2, 2021.

The Q2 2021 growth rate was higher than the -6.10 percent growth rate recorded in Q2 2020 and the 0.51 percent recorded in Q1 2021 year on year, indicating the return of business and economic activity near levels seen prior to the nationwide implementation of COVID-19 related restrictions.

Analysts say blue chip firms with over N1 trillion of cash on their books need to begin to put some of that cash to work in terms of expansions of plants, property and equipment, to help sustain the recovery.

Cement makers in particular are hoarding cash.

Dangote Cement, the most capitalized firm in Africa’s largest economy and the largest producer of the building materials, BUA Cement, and Lafarge Africa have a combined cash hoard of N207.13 billion as at June 2021.

Consumer goods firms also hold a mountain of cash as deteriorating purchasing power of consumers stoked by inflationary pressures, unemployment, and spiraling utilities bills means they are struggling to find investment opportunities as they are cutting back on capital expenditure spending.

The largest consumer goods firms have a combined cash pile of N464.63 billion as at June 2021, which is 46.96 percent higher than 2020’s N316.16 billion.

Companies took advantage of low interest rates to borrow more money, which has helped boost both cash — and debt levels, as they shunned initial public offerings and embraced short term commercial papers (CPs).

As of April 2021, there were 46 registered CP programmes on the platform of FMDQ OTC Securities Exchange worth N3.09 trillion in value.

Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.

Maturities on commercial paper typically last several days, and rarely range longer than 270 days. They are usually issued at a discount.

Dangote Cement has established a new N150 billion Commercial Paper. It has issued an aggregate of N450 billion in Commercial Papers since 2018.

In April, Flour Mills of Nigeria Plc announced the issuance of N30 billion (13 and 14), under its N100 billion CP programme, which was registered with the FMDQ OTC Plc.

BUA Cement successfully concluded its N115 billion Series 1 Fixed Rate Senior Unsecured Bond Issue under its maiden N200 billion Bond Issuance Programme.

MTN Nigeria had completed its N100 billion Commercial Paper (CP) Issuance (series 1 & 2).

An analyst who spoke to MoneyCentral said there are indications that firms may start putting those cash to work now that debt is becoming more expensive and a consistent economic growth could accelerate capital expenditure spending.

Yields on fixed income instruments which were depressed last year (due to the central bank’s dovish monetary policy amid the pandemic) have been on an upward trajectory in 2021 amidst strong local demand for higher yields and the need to attract foreign interest in Nigerian securities amid a dollar shortage.

However, there are concerns that the Delta variant of the coronavirus pandemic could undermine economic recovery and make firms sit on the pile of cash in their balance sheet.

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