It’s a recovery that is under way in the US, where the value of non-financial corporate commercial paper (CP) outstanding hit $243 billion in October – the highest since before the 2008 financial crisis.
Total outstandings in the US fell from $2.16 trillion in 2007 to less than $1 trillion at the start of 2013.
In the euro commercial paper (ECP) market, non-financial corporate issuance could be poised for a renaissance too, despite a lack of growth in the market as a whole.
On the one hand, last year recorded the lowest annual volume of ECP since 2003, according to data from Dealogic, with total volumes amounting to $2.34 trillion – down 18% on 2012. Furthermore, monthly outstanding ECP volume was $455.4 billion at the end of last year – 8% lower than the previous year and the lowest end-of-month total since the same period in 2003.
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| Source: Dealogic |
Nevertheless, Kieran Davis, head of European short-term credit trading at Barclays, says while outstandings in the ECP market have not grown in the past year, there is more going on than meets the eye.
“We’ve seen a further decrease in bank outstandings – specifically euro bank outstandings – but that has been counterbalanced by the proliferation of issuance seen in the sovereign agency sector and the corporate sector,” he says.
With loans to corporates becoming expensive, Davis says more investment banks are incentivizing their corporate clients to access the capital markets by selling CP.
“In the bigger scheme of things, the all-in cost of funding is lower in the commercial paper market than in the term market, albeit with lower duration,” he says.
“The commercial paper market has also been a lot more receptive to a wider array of issuers, from Imperial Tobacco to General Electric – so arguably there’s more capacity for the high, low and even lower BBB-rated issuers, which we wouldn’t have had in 2006/2007, when the market was very much an A1 P1-rated sector.”
One of the factors that has held back the corporate ECP market is a lack of issuers. Hans-Peter Rupprecht, head of Siemens treasury, says the reason for a thin CP market in Europe is not a lack of investors but the fact most large corporations are sitting on excess liquidity.
“Investors would be delighted to buy commercial papers in case it will be issued by corporations with a good credit standing,” says Rupprecht.
David Hayes, head of ECP business at Citi, agrees that supply, rather than demand, has been the greatest obstacle for the ECP market in recent years.
“There’s always been really good demand for tier 1 corporate commercial paper in the euro market, but there has not been a lot of supply,” he says. “Demand has been very consistent and very strong.”
One of the main stumbling blocks for corporate issuers is there has been little economic advantage to issuing in the ECP market rather than in the US.
Hayes says in recent years highly rated corporates that historically had been accessing the European CP market every day had shifted to using the US market, where they would issue in dollars and swap the proceeds back to euros.
“It was cheaper for them on a cost basis to issue US dollars and do a foreign-exchange swap to raise euros – they would pick up between 10 and 20 basis points by doing that, rather than straight euro issuance in the ECP market,” he says.
However, this trend is now beginning to reverse as the differential has decreased. “To save them doing the mechanics of a foreign-exchange swap, they’re just posting in straight euros now,” adds Hayes.
“In the last year or so, we’ve seen a few tier 1 multinational corporates coming across to the ECP market and posting euro-denominated commercial paper out to one- to three-month tenors.”
For some companies, domestic CP or shorter-term debt markets might become more accessible.
Olivier Guelaud, group financing and treasury director at drinks group Pernod Ricard, says the company is not active in the ECP market, but has used the French billets de trésorerie market, which is dominated by large French corporations.
He says an initiative is under way, led by Banque de France, Paris Chamber of Commerce and AFTE (the French association of corporate treasurers) to expand access to this short-term market to strong small and medium-sized enterprises.
Hayes predicts that this year more corporates which are big issuers in the US market will gradually begin to issue ECP again, and that this applies not only to issuers that have existing CP issuing programmes in both markets but also to companies that have not yet established an ECP programme.
“In the last few years, there’s been somewhat limited interest from large multinationals to put an ECP programme in place,” says Hayes.
“However, we’re seeing more clients and prospective clients showing an interest in establishing an ECP programme for the first time – so that will start to bear some fruit in the next year or so.”