More and more dealers are coming back into the euro-commercial paper market which several of them quit almost a decade ago due to thin margins and low volumes. CSFB, Merrill Lynch and Morgan Stanley have returned to non-dollar CP to compete with firms like Citibank, Barclays Capital, Deutsche Bank, JP Morgan, NatWest, Goldman Sachs, UBS Warburg, and Lehman Brothers which stuck at it through the 1990s. The attraction is in potentially fast-growing volumes now that the single currency has removed many of the artificial barriers between national commercial paper markets and the international market that operated out of London. It is increasingly a market with a global following. The big dealers sell ECP around the world: to the Japanese investment trust manager, the middle eastern bank, the Latin American central bank. Japanese money market funds are increasingly large investors in ECP.
In Europe, which now accounts for two thirds of total investment in ECP, corporations and institutional investors are seeking to make their cash holdings produce higher returns.
The arrival of large rated money market funds, which maintain enough cash to meet expected short-term redemptions while at the same time boosting the average life of their investments by holding three and six month maturity CP, have helped. Average ticket sizes are increasing with $20-25 million trades replacing the once standard $10-15 million lots.
And issuers’ use of CP proceeds is changing.
Large mergers and acquisitions have been funded by issues of up to e500 million of commercial paper which then rolls off and is replaced with longer term bond finance.
Several large European corporations which were set to embrace the new euro corporate bond market in 2000 have stayed out as credit spreads widened in recent months. Instead they have funded at sub-Libor levels by issuing billions of euros worth of commercial paper.
European sovereign borrowers have entered the market, setting up international Treasury bill programmes to replace domestic T-bill auctions. Dealers treat these as essentially ECP programmes and many are officially designated such. European banks have also recast CD programmes as commercial paper programmes often issuing through London branches. And asset-backed ECP is set to grow.
“On that basis I can quite see this becoming a $500 billion equivalent market,” says Colin Withers, head of ECP at Citibank, the dealer with one of the strongest track record in ECP and a broad exposure to all kinds of programmes and investors in ECP. Today, adding together ECP and the various euroland domestic markets gives total outstandings of $320 billion. For all the encouraging trends, in the short-term growth has been held back by the bearish interest rate outlook. While the US market boasts overnight CP, the ECP market offers nothing shorter then seven day maturities, and so worried have many investors been in recent months that they have kept cash in the overnight interbank market.
Citibank’s forex strength allows it to deal in CP in 23 different currencies. Its long standing in the market has allowed it to amass 525 signed dealerships for issuers from 57 different countries, though at least one quarter of these are dormant. It’s active programmes include 201 for banks and financial institutions, 147 for corporates and 48 for sovereigns or state agencies. It is the leading dealer on 56% of these programmes. At the start of this year it had $52 billion in outstanding placements and it aims to grow this to $100 billion in the next two years. It sells to nearly 600 investors around the world.
In 1999, it attracted 62 new dealerships and another 6 in the first four months of this year. Withers hopes that corporate issuers will grow as a percentage and Citibank plans to increase its share of the lower rated A2/P2 market, hoping that in calmer market conditions investors will seek higher returns by moving down the credit curve.
The problem for ECP dealers is that no matter how promising the outlook for volumes, margins remain lousy. While US dealers have held out for a roughly 5bp standard margin, European dealers are lucky to make 2bp. This is probably a legacy of the competition at the market’s outset from 1984 when over 50 banks acted as dealers. Today there are no more than 14, and at any given time two or three of these will reduce commitments. It may be that a bank like Citibank has more incentive than many to keep the CP market open. If it didn’t borrowers would draw down on revolving credit and much of that $50 billion would become loans on its balance sheet. The good news is that the internet is making the market more visible and efficient. Withers’ team is 14 people. UBS Warburg maintains decent coverage of 250 active programmes with a team of 4 people, after being the first dealer to push through internet-based CP systems last year.
Withers is not sure how this will develop. “It’s fine offering CP on the net but a lot of investors are reluctant to execute as they still prefer to telephone the salesperson and negotiate the best deal.”
