The US commercial paper market and the Euro-commercial paper market were, until recently, quite separate, making global awards in this category impracticable. The US market was dominated by the leading investment banks, notably Lehman Brothers and Goldman Sachs, which specialized in placing corporate paper with huge money-market mutual funds. Europe was a fragmented series of national markets where large national funds bought local-currency issues or dollar paper currency swapped. Leading intermediaries included more commercial banks, such as Citigroup and Deutsche, as well as Lehman and Goldman. Other banks and investment banks came and went as dealers.
Since the introduction of the European single currency, the Euro-CP market has grown markedly. Large funds across the continent found themselves able to buy a broad range of issues in their home currencies. That's paved the way for the latest development: global CP programmes.
"We think that one of the key advantages we bring to clients in the money-market business is that we're one of the very few firms that has dominant positions in all the regions, across the US and Europe and with strong distribution in Asia," says John Willian, head of global money markets at Goldman Sachs. "Programmes like the recent one for AT&T exemplify what can now be achieved through offering global solutions to clients that wish to access a broad new investor base at attractive rates." AT&T is a huge borrower in the US CP market and a long-standing Goldman client, but had ignored Europe since setting up an experimental E-CP programme in 1993 when the European market accounted for roughly $80 billion. It now stands at $250 billion. When AT&T started issuing in June, despite its prized A1/P1 rating being under threat, it sold $2.8 billion within five days in a range of currencies to a broad group of international investors, some of which have been encouraged to buy its US paper.
For several months now Goldman has been arranging global CP programmes for such companies as Allied Domecq, Shell Finance and Deutsche Telekom. It has become clear to borrowers that accessing the huge liquidity in short-term funds can be an important strategic resource at a time when bank credit is in short supply and becoming expensive. This was the lesson Goldman drew when it arranged financing for Royal Bank of Scotland's cash offer to NatWest shareholders over a year ago. Though RBS was then a regional bank with a defined group of investors in its CDs, it was able to place huge amounts.
So when Unilever was looking at ways to pre-fund its £21 billion acquisition of Best Foods last September, it decided the best way to optimize its funding was in the shorter-term debt markets. Goldman devised a two-part strategy combining issuance of 13-month floating rate notes and US and euro CP.
Unilever launched a two-tranche issue of 13-month floating-rate notes offering a $6 billion US dollar tranche and e1.5 billion euro tranche in the US domestic and euro markets. The euro notes were issued under Unilever's EMTN programme and the US notes were documented under a new short-term notes programme, a variation on CP arranged by Goldman Sachs.
The low cost of this funding was impressive. The US dollar tranche was reoffered at Libor plus 3bp and the euro tranche was reoffered at euribor plus 10bp.
The notes were sold to a total of 55 investors in the US and 123 in Europe. This transaction illustrated powerfully the tremendous buying power of the US investment community. The transaction generated orders of $14 billion in the US and e2 billion in Europe. In the US book there were five orders in excess of $1 billion and two of these were for $2 billion.
At the same time, Unilever did not cannibalise its investor base for succeeding long-term issues. Finally, Unilever was able to use this financing approach to optimise its use of the bank credit market leading to further cost savings. Goldman was also the leading dealer in a build-up in CP outstandings to $8 billion across the E-CP and US CP markets.
Goldman has also brought some innovation to the market. It introduced what it calls extendible commercial notes. These are designed to act like traditional short-term commercial paper maturing after, say, one month but with an option for the issuer to extend the note for up to 13 months' maturity, just inside the maximum permissible maturity for the $2 trillion pool of money in money-market mutual funds. The idea is build a form of back-stop funding guarantee into a short-term issue. If notes are extended, perhaps while an issuer resolves short-term liquidity or ratings problems, it has to pay a high rate. "Introducing instruments like ECNs is another aspect of what differentiates us," says John Delaney, executive director in London. "We're helping clients to find ways to tap into alternative sources of liquidity at a time when bank back-up liquidity is becoming less plentiful."
Goldman is also a big dealer in the growing repo market, to which money-market funds are increasingly attracted in search of diversification and collateralized investments.