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Peak Performance for Euro Commercial Paper
Philippe Laurensy, Euroclear - 30 May 2005
As companies turn away from bank loans as their first choice of funding, the euro commercial paper market is seeing huge increases in trades and volumes. Automation and standardisation are making issuance quicker and easier, while the variety of programmes now available are also attracting more investors.
The euro commercial paper (ECP) market has grown by 100 per cent since the end of 2001, but this streak has been going on for much longer - in fact, for nine consecutive years. This market, comprising US$500bn worth of outstanding paper, has only just begun to attract the breadth and critical mass of programmes to whet the growing appetite of ECP investors. What are the drivers behind this upturn?
First, the manner in which capital is raised in Europe is changing. Ten years ago, a firm would typically turn to their bank of choice and take out a loan with a straightforward repayment schedule. Today, national and multinational firms are less reliant on bank loans and are increasingly turning to commercial paper as a means to satisfy short-term funding needs.
A second trend bolstering ECP growth is the automation and standardisation of issuance and processing methods. Simply put, today's technology has made it a lot easier to issue commercial paper and certificates of deposit (CDs). Take, for example, the European Pre-Issuance Messaging System (EPIM). Launched in 2002, EPIM automates pre-issuance information processing and ISIN allocations for new issues of short-term instruments. In its brief history, it has already gone a long way to increase the levels of straight-through processing (STP). According to JPMorgan's estimates, 80 per cent of new short-term issues are now being processed through EPIM, so a critical mass of transactions using EPIM has certainly been reached. EPIM, originally created by Euroclear, DTCC and Clearstream, greatly simplifies, speeds up and harmonises the communication between all parties involved in a new ECP issue.
Another driver behind this exceptional growth is the diversity of products entering the market. Structured vehicles like asset-backed euro commercial paper (ABCP) coupled with short-term corporate paper are changing what once was a predominantly inter-bank market. With the emergence of new products, one might expect a decrease in the rating quality of the paper issued, but this is not the case. Investor demand remains as strong as ever for highly rated paper. According to Bank of America Securities statistics, close to 90 per cent of all outstanding ECP is rated A-/P-1 or above, and a further 3 per cent falls into the second tier of A-2/P-2. Based on this, only one in every 10 issues would not meet investment-grade requirements.
The Changing Face of ECP
Although the banking sector still commands approximately 50 per cent of all ECP, ABCP and corporate issues are making real inroads and winning ground from the banking sector. Today, asset-backed and corporate issues account for 45 per cent of the total, with the remaining 5 per cent attributable to sovereign and supranational issuers.
Energy is sparking the continued growth in corporate ECP issuance. In fact, energy and utility company issues have surged over the past five years and now lead the corporate sector race in terms of ECP issuance. In 2000, companies from the energy sector accounted for just under 20 per cent of all corporate issues; today, that figure has doubled.
Globally, the currency mix of commercial paper has remained stable over the years, with the euro accounting for 46 per cent of all issues, followed by the dollar and sterling at 28 per cent and 19 per cent, respectively. The euro is consistently strong, and is gaining ever-more credibility as a currency in which to raise capital.
French Lessons
Operationally, some European markets are more adept than others in terms of having the internationally competitive infrastructure in place to support euro-denominated commercial paper.
France is a good example of how long-term infrastructure investment has produced a well-functioning ECP market. It is widely regarded as a fully dematerialised, transparent and regulated market, one that is attractive to both issuers and fund managers when selecting short-term paper for their fund baskets.
Today, France is the world's third largest domestic CP market, behind the US and Japan. Domestic CP from non-financial firms, known as Billets de Tresorerie (Treasury Notes), and Certificats de Dépôt (Certificates of Deposit), are the instruments issued by financial firms. Combined, these two types of paper accounted for a phenomenal outstanding of €300bn at the end of 2004. While the growth in the French market's appetite for CP is partly attributable to the introduction of the euro, encouraging more non-French issuers to issue CP in France, a large portion of its success can be attributed to the solid infrastructure in place underpinning the efficient issuance of such paper.
For example, Unilever became the first-ever issuer of one-day ECP back in April 2003. Since then, the company has tapped the market with same-day paper nearly every day through Euroclear France. By leveraging Euroclear France's real-time settlement infrastructure, the issuing and paying agent inputs a single instruction to Euroclear France, which then automatically allocates an ISIN and common code for the issue before issuing and delivering it against payment to the relevant dealer. Euroclear France's RGV system also automatically calculates and processes the final payment and redemption order. The entire same-day process is fully automated ensuring that no manual intervention is required. Furthermore, it is equally able to manage both fixed rate and floating-rate money market securities.
The Sky is the Limit
The future growth potential for ECP is massive. Today's active issuers have come to rely on automation and standardisation as the industry norm in processing the proliferation of same-day and short-term paper. Without STP automation, a service provider like Euroclear would not be able to keep up with the market's demand for short-term financing. Euroclear currently processes more than 6,000 new ECP issues per month.
Europe is in the spotlight. Many of the right elements are in place for the ECP market to reach the giddy heights of commercial paper issuance witnessed in the US today. Investors need only to knock - the door is open.
Philippe Laurensy, Euroclear - 30 May 2005
As companies turn away from bank loans as their first choice of funding, the euro commercial paper market is seeing huge increases in trades and volumes. Automation and standardisation are making issuance quicker and easier, while the variety of programmes now available are also attracting more investors.
The euro commercial paper (ECP) market has grown by 100 per cent since the end of 2001, but this streak has been going on for much longer - in fact, for nine consecutive years. This market, comprising US$500bn worth of outstanding paper, has only just begun to attract the breadth and critical mass of programmes to whet the growing appetite of ECP investors. What are the drivers behind this upturn?
First, the manner in which capital is raised in Europe is changing. Ten years ago, a firm would typically turn to their bank of choice and take out a loan with a straightforward repayment schedule. Today, national and multinational firms are less reliant on bank loans and are increasingly turning to commercial paper as a means to satisfy short-term funding needs.
A second trend bolstering ECP growth is the automation and standardisation of issuance and processing methods. Simply put, today's technology has made it a lot easier to issue commercial paper and certificates of deposit (CDs). Take, for example, the European Pre-Issuance Messaging System (EPIM). Launched in 2002, EPIM automates pre-issuance information processing and ISIN allocations for new issues of short-term instruments. In its brief history, it has already gone a long way to increase the levels of straight-through processing (STP). According to JPMorgan's estimates, 80 per cent of new short-term issues are now being processed through EPIM, so a critical mass of transactions using EPIM has certainly been reached. EPIM, originally created by Euroclear, DTCC and Clearstream, greatly simplifies, speeds up and harmonises the communication between all parties involved in a new ECP issue.
Another driver behind this exceptional growth is the diversity of products entering the market. Structured vehicles like asset-backed euro commercial paper (ABCP) coupled with short-term corporate paper are changing what once was a predominantly inter-bank market. With the emergence of new products, one might expect a decrease in the rating quality of the paper issued, but this is not the case. Investor demand remains as strong as ever for highly rated paper. According to Bank of America Securities statistics, close to 90 per cent of all outstanding ECP is rated A-/P-1 or above, and a further 3 per cent falls into the second tier of A-2/P-2. Based on this, only one in every 10 issues would not meet investment-grade requirements.
The Changing Face of ECP
Although the banking sector still commands approximately 50 per cent of all ECP, ABCP and corporate issues are making real inroads and winning ground from the banking sector. Today, asset-backed and corporate issues account for 45 per cent of the total, with the remaining 5 per cent attributable to sovereign and supranational issuers.
Energy is sparking the continued growth in corporate ECP issuance. In fact, energy and utility company issues have surged over the past five years and now lead the corporate sector race in terms of ECP issuance. In 2000, companies from the energy sector accounted for just under 20 per cent of all corporate issues; today, that figure has doubled.
Globally, the currency mix of commercial paper has remained stable over the years, with the euro accounting for 46 per cent of all issues, followed by the dollar and sterling at 28 per cent and 19 per cent, respectively. The euro is consistently strong, and is gaining ever-more credibility as a currency in which to raise capital.
French Lessons
Operationally, some European markets are more adept than others in terms of having the internationally competitive infrastructure in place to support euro-denominated commercial paper.
France is a good example of how long-term infrastructure investment has produced a well-functioning ECP market. It is widely regarded as a fully dematerialised, transparent and regulated market, one that is attractive to both issuers and fund managers when selecting short-term paper for their fund baskets.
Today, France is the world's third largest domestic CP market, behind the US and Japan. Domestic CP from non-financial firms, known as Billets de Tresorerie (Treasury Notes), and Certificats de Dépôt (Certificates of Deposit), are the instruments issued by financial firms. Combined, these two types of paper accounted for a phenomenal outstanding of €300bn at the end of 2004. While the growth in the French market's appetite for CP is partly attributable to the introduction of the euro, encouraging more non-French issuers to issue CP in France, a large portion of its success can be attributed to the solid infrastructure in place underpinning the efficient issuance of such paper.
For example, Unilever became the first-ever issuer of one-day ECP back in April 2003. Since then, the company has tapped the market with same-day paper nearly every day through Euroclear France. By leveraging Euroclear France's real-time settlement infrastructure, the issuing and paying agent inputs a single instruction to Euroclear France, which then automatically allocates an ISIN and common code for the issue before issuing and delivering it against payment to the relevant dealer. Euroclear France's RGV system also automatically calculates and processes the final payment and redemption order. The entire same-day process is fully automated ensuring that no manual intervention is required. Furthermore, it is equally able to manage both fixed rate and floating-rate money market securities.
The Sky is the Limit
The future growth potential for ECP is massive. Today's active issuers have come to rely on automation and standardisation as the industry norm in processing the proliferation of same-day and short-term paper. Without STP automation, a service provider like Euroclear would not be able to keep up with the market's demand for short-term financing. Euroclear currently processes more than 6,000 new ECP issues per month.
Europe is in the spotlight. Many of the right elements are in place for the ECP market to reach the giddy heights of commercial paper issuance witnessed in the US today. Investors need only to knock - the door is open.