While I write this article, I imagine myself listening to a 1980s hip hop artist. However, a DMTN is not the name of a notorious 1980s hip hop group but rather a reference to a Domestic Medium Term Note programme (“DMTN”).
Practically, most companies that utilise this form of financing use this debt programme to manage the cash flows coming into the company. The DMTN programme is viewed almost like a ‘war chest’ which a company can access for varying needs. A company can customise the issue by varying the maturities in the issue to meet the particular financing needs of a company.
The term medium indicates that maturities usually reach a maximum length of 10 years to a minimum of one year. DMTN programmes are useful due to the fact that a company can access debt through a tap issue as long as the amount in issue does not exceed the programme amount (the maximum that can be borrowed according to the programme memorandum).
The DMTN value proposition
For businesses capable of accessing a DMTN programme it is quite attractive compared to a traditional banking facility:
- Comparably, the administration cost is less for a DMTN programme on an on-going basis; and
- The initial costs for a DMTN programme are for the implementation of the structure and any due diligence required prior to commencement of the programme.
Now, compare these initial costs for a DMTN programme to a normal bank credit facility.
Every time a company draws down on the credit facility the company incurs a drawdown cost as well as the on-going interest costs.
Even if the drawdown costs are built into the raising fee there are also other costs such as renewal fees whenever the facility has to be renewed.
There are a few considerations that should be noted before undertaking a DMTN programme. In terms of the commercial paper regulation, which is governed by the South African Reserve Bank (SARB), money that is raised from the general public cannot be lent onwards to the general public if a company does not have a banking licence. This represents a problem for some micro-lenders in the public arena that need capital in order to expand operations and fund new products.
This problem can be overcome with a good partner in the banking landscape that can facilitate the transaction. Other companies can use the capital injection in the form of funding working capital requirements or expanding operations depending on what the usage of the DMTN programme was specified for.
DMTN programmes are usually for fairly large companies that require at least R500 million in funding. Initial costs of the DMTN programme are expensive which denotes that the marginal costs of the programme outweigh marginal benefit if the programme amount is too small. The marginal benefit starts to outweigh the marginal cost at high levels of funding which is why the minimum amount that should be raised is normally in the order of R500 million.