Investing in Commercial Papers: A Guide to Sycamore's Offering

Commercial Papers (CPs) are short-term debt instruments that offer individuals and institutions an opportunity to invest in corporate debt. 

Similar to Treasury Bills, CPs are issued by large corporations rather than the government, effectively serving as the "private sector's version of Treasury Bills". 

They are a popular choice for short-term financial goals, providing fixed returns over a specific period and generally considered a low-risk investment option.

What Exactly Are Commercial Papers?

Commercial Papers are essentially short-term loans taken out by companies to raise working capital. 

When you invest in a CP, you are lending money to a vetted company for a set period. These instruments have a maximum duration of 270 days.

How Commercial Papers Work in General

• Issuance: Corporations that need funds issue CPs to the general public, including retail investors, corporates, and financial institutions, to raise capital.

• Grading and Risk: The issuer plays a significant role in the grading and risk assessment of the investment.
  Companies that issue CPs are rated based on their financial statements, history, and the likelihood of honoring their promises. This grading helps determine if the asset is high-risk, medium-risk, or low-risk.

• Returns vs. Other Instruments: Due to the government being the strongest backer of any security, returns on Commercial Papers are typically higher than those of Treasury Bills and Bonds. However, they are usually lower than what a company might get from a commercial bank loan.

• Unsecured Nature: It's crucial to understand that CPs are unsecured. This means if the issuing company faces a shutdown, there's no specific protection, which is why their grading is so important.

• Market Listing: Commercial Papers are quoted on the FMDQ and traded on the FMDQ-Bloomberg E-Bond Trading and Surveillance System.

• Who Can Invest: Traditionally, Qualified Institutional Investors (QIIs) and Eligible Individual Investors (EIIs) could invest, with Dealing Members ensuring compliance. However, fintech apps like Sycamore now list these CPs, allowing retail investors to participate.

Investing in Commercial Papers on the Sycamore App

Sycamore makes investing in Commercial Papers accessible for its users.

• Eligibility: Any verified user with an active account and a funded wallet on the Sycamore app can invest in available Commercial Papers.

• Minimum Investment: The minimum investment amount varies per specific CP, with each displaying its threshold on its details page. However, there's a general minimum investment threshold of ₦100,000.

• Fixed Returns: Returns on Sycamore CPs are fixed and guaranteed, with the interest rate disclosed upfront at the time of investment.

• Interest Calculation and Payout: Interest is calculated using a discounted purchase model. At maturity, your total returns (principal plus interest) are credited to your Sycamore wallet, minus a 10% withholding tax and any applicable transaction fees. You can then withdraw, reinvest, or use the funds for other services.

• Tenor: CP tenors on Sycamore typically range from 30 to 270 days, with the exact duration displayed on the details page before you invest.

• Non-Liquid Nature: It's vital to remember that Commercial Papers are non-liquid. Early withdrawal or liquidation is not permitted, and your funds will be locked until the maturity date.

• Viewing Investments: You can monitor all your CP investments, including their performance, maturity status, and returns, by navigating to Investments > Commercial Papers > See Portfolio within the app.

• Payment Options: Sycamore offers flexible payment methods: your Naira Wallet, a Debit Card, or Paystack (an online gateway with a ₦2,000 fee cap).

• Diversification: You have the option to invest in multiple CPs concurrently, allowing you to diversify your short-term investments across various issuers and tenors.

Understanding Payment Options: Discounted Value vs. Full Face Value

When making an investment on the Sycamore app, you'll choose between two payment structures:

• Discounted Value: With this option, you pay less than the full face value upfront. The amount is determined by the investment's discount rate. At maturity, you receive your principal and the earned interest. This is suitable if you prefer a lower initial outlay.

• Full Face Value: Here, you pay the entire face value of the CP upfront without any discount. At maturity, you receive the face value plus interest based on the offer. Both options provide flexibility to align with your financial goals.

Discount Rate vs. Interest Rate

These two terms, while related, refer to different aspects of your investment:

• Discount Rate: This is the rate seen on the overview or offer details page. It determines how much less you pay upfront compared to the full face value of the Commercial Paper. A higher discount rate means a lower upfront payment.

• Interest Rate: This rate is displayed on the confirmation page. It is used to calculate your total earnings by the end of the investment, reflecting the gain on your investment over the period.

In essence, the discount rate affects your entry cost, while the interest rate determines your total earnings at maturity.

Safety and Risk Classification on Sycamore

While all investments carry inherent risks , Sycamore aims to mitigate this by only listing CPs issued by vetted companies. 

Each Commercial Paper on Sycamore is assigned a descriptive credit rating and Sycamore’s custom risk classification, such as "Conservative," "Balanced," or "Moderately Aggressive". 

These ratings indicate the issuer's risk profile, helping you make informed investment choices that align with your personal risk appetite. 

Detailed issuer information is also provided for transparency. It's always crucial to ask, "who is issuing the commercial paper?" to understand the inherent risk.