Commercial Paper or Bonds: Which Should Cash-Strapped African Startups Resort to?

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In September 2020, Nigeria’s embattled Metro Africa Xpress (MAX) found itself gasping for survival. A year before, a controversial ban on all ride-hailing platforms by the country’s south-western state of Lagos, meant the 5-year-old startup, distinctly marked by its yellow livery and motorbikes, was terribly shaken. Supported by the $8.5 million funding it secured from leading investors — including Novastar Ventures and Goodwell Investments’ uMunthu Fund — it was only a matter of time before Max.ng’s resilience would be tested.

But the test did not come, at least not in a fatal way. The startup, led by Adetayo Bamiduro, had prepared an ambush: an emergency fundraising round from Nigeria’s traditional debt markets. Described as ‘a one-year fixed-rate series 1 bond issue,’ and with a total of $1 million raised out of a $22 million (N10 billion) private company bond program of the company, the bond issuance offered Max.ng a major lifeline. The company would only later, in 2021, raise $31 million in the first close of a Series B funding round, led by the global private equity platform Lightrock and UAE-based international venture capital firm Global Ventures. The bond issuance would be the very last for Max.ng, at least as far as publicly disclosed.

Similar circumstances unfolded for Moove, a Nigerian startup that offers revenue-based vehicle finance. In 2022, the company announced it was raising $30 million through a private placement Islamic bond issuance. The sukuk organized by Franklin Templeton’s Middle East division was structured as a Sharia-compliant debt arrangement and was intended, at the heart of the funding winter, to assist Moove in scaling to 2,000 EVs in the UAE. Since the sukuk issuance, the company has raised $250 million in equity and $210 million in debt.

An Unpopular Fundraising Route for African Startups

African startups have mostly relied on equity and traditional debt to fund most of their ventures. Resorts are often made to traditional debt instruments such as bonds and commercial papers in extreme circumstances. For instance, the majority of all the funding using bonds and commercial papers occurred at the heart of the coronavirus pandemic in 2020 and at the start of the decline in funding to African startups in the last quarter of 2022. All of the bond placements made by African startups in 2022 (Lulalend, December 2022; Blnk, November 2022; Global Accelerex Limited, September 2022; Moove, December 2022) all happened in the last quarter of 2022. Hence, the resort to bond placements or commercial papers was seen as a survival tactic to beat the funding winter and the accompanying ‘down rounds’ and devaluation of startups.

“The African Tech sector was one of the very few, if not the only, VC markets to boast net growth funding in 2022. Globally, VC funding fell by 35% over the same period. However, looking closely at the figures, this market was not left unscathed. We can see the slowdown began to seep into the African market in the first quarter of the year, with a 14% drop in activity compared to the last three months of 2021. Despite this, African startups still closed record funding in the first half of the year. In Q3, the slowdown really kicked in, with a year-on-year decrease in the number of deals and funding raised,” noted Partech, a venture capital firm, in its 2022 report.

This Type of Funding Mechanism is Mostly Explored by Growth Stage African Startups

While seed-stage startups in Africa have historically relied on convertible notes for funding, the amounts raised have often paled in comparison to the substantial sums amassed through traditional bond or commercial paper issuances by institutional investors. Moreover, the typical structure of seed-stage startups is not sufficiently developed to navigate the complexities of bond or commercial paper issuances.

Consequently, a significant portion of funds directed towards African startups via bond/commercial paper avenues tends to gravitate towards growth-stage enterprises. For example, in 2022, out of a total of US$1.5 billion raised in 71 separate debt deals, nine companies secured a whopping US$1 billion collectively. Notably, transactions ranged from US$40 million with Moove.Africa to US$238 million with D.Light, comprising 66% of the total debt raised throughout the year. These companies predominantly operate at the growth stage.

Explaining why data does not favor seed-stage African startups when it comes to debt financing, Peter Oriaifo, a Principal at Oui Capital, insists that debt is a “tool available to cashflow-positive businesses.” Peter says although most startups in Africa that have raised debt financing are not cashflow-positive, “they have opted for this type of financing in some cases because they operate an asset-heavy business model or encountered difficulty raising venture funding in exchange for equity.”

“If debt isn’t being drawn down through earned cash flows, upstream investors may grow weary that their newly invested funds will not necessarily be spent on growth but funding venture debt,” Peter adds.

Bond/Commercial Paper Issuances are Mostly Used by Fintech and Heavy-Asset Mobility/Cleantech Startups in Africa

Commercial papers/bond placements are mostly used by fintech, heavy asset mobility, and cleantech startups to finance their operations. In 2022 alone, fintech captured a total of US$691M, i.e., 45% of debt funding, through 32 deals representing 45% of the total deal count. Cleantech led the charts as #1, totaling $605M (unchanged year-over-year) or 50% of debt funding in 2023, through 18 deals (a 13% increase year-over-year) representing 24% of the total deal count.

The table below shows that African fintech and mobility/cleantech startups have dominated startup fundraising in Africa through the use of bonds or commercial papers.

Name of StartupsCountry of StartupType of Debt Instrument Year RaisedAmount Placed/RaisedIssuing Houses/Investors
 
Interswitch Africa One Plc.NigeriaBond2020NGN23 Billion ($63M)ABSA Capital Markets Nigeria; FCMB Capital Markets; Quantum Zenith Capital & Investments; and Rand Merchant Bank Nigeria
Twiga FoodKenyaConvertible Bond2023$35MPrivate Placement: Creadev, a subsidiary of the Mulliez Family Association; Juven, a Goldman Sachs spinoff
Moove NigeriaIslamic Bond (Sukuk)2022$30MFranklin Templeton’s Middle East division
Data IntegratedKenyaConvertible  Bond2020UndisclosedToyota Tsusho
Metro Africa Xpress (MAX) NigeriaBond2020NGN10bn ($22M) Private Placement
MNT-HalanEgyptBond2023$130MCl Capital; CIB Egypt; Al Ahli Bank of Kuwait, Al Baraka Bank Egypt, Arab African International Bank, Arab African Investment Management (AAIM), MIDBANK, Misr Real Estate Asset Management Company, The Saudi Investment Bank, Bank ABC, Arab International Bank, Banque Misr, and بنك التعمير والإسكان HD Bank.
LulalendSouth AfricaSocial Bond2022$4.7M Symbiotics’ bond issuing platform (Micro, Small & Medium Enterprises Bonds S.A.); Luxembourg Stock Exchange’s Securities Official List
BlnkEgyptBond2022$23.7 millionPrivate Placement: Abu Dhabi’s Emirates International Investment Company (EIIC); Sawari Ventures; National Bank of Egypt; Banque du Caire. 
Global Accelerex LimitedNigeriaBond2022NGN20bn ($48M)FBN Quest Limited; Renaissance Securities Limited; Greenwich Merchant Bank Limited; and Nova Bank Limited
AiCareKenyaConvertible Bond2021UndisclosedToyota Tsusho

Bonds or Commercial Papers: Which is More Popular?

African startups predominantly favor bonds, both convertible and non-convertible, over commercial papers. Commercial papers, characterized by short-term debt and issued as promissory notes by corporations to fulfill working capital needs, typically have a maturity ranging from 15 to 270 days, including potential rollovers.

In contrast, bonds serve as medium to long-term debt instruments, typically extending beyond one year to three years or more. Public issuance of bonds typically entails engagement with regulatory bodies, a step less frequently required for commercial papers.

Despite these distinctions, African startups often opt for bonds due to their advantageous long-term redemption features. Notably, apart from Nigeria-based FairMoney, which recently redeemed its debut N2.5 billion Series 1 Commercial Paper (CP) Issuance maturing on March 3, 2024, there’s been limited public record of other African startups utilizing commercial paper issuances for fundraising.

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