While US institutional investors have embraced commercial paper as an asset class for more than 30 years, most in Europe have taken a little longer to build a rapport with short-term debt. Indeed, traditionally, European commercial paper (ECP) has been regarded as something of a buyer’s market.
But the growth of the single currency, the explosion of money market funds, and changes in regulations have led to European investors becoming, well, rather fond of ECP actually, and the relationship looks set to blossom further in 2003.
ECP outstandings finished 2002 at $305bn (E288bn), up 23% on 2001, and the month of November saw an all-time high of $321bn. The market is now up 136% since EMU, and the five-year annual growth rate is 23%. Furthermore, for the first time 2002 saw issuance in commercial paper denominated in euros overtake that denominated in US dollars, making it the single most important currency of issue in the ECP market, with 40% of outstandings.
Peter Eisenhardt, vice president at JPMorgan, believes the ECP market will grow further. Explaining the virtues of investing in ECP, he says: “European commercial paper offers a better yield than bank deposits, which, for some investors, is reason alone. But it is also its flexibility as an asset class that appeals – offering a wide range of credits, and a high credit quality market.
“Money funds, pension funds, bank portfolios, central banks, corporates, just about anybody with any spare cash who would like to do better than a bank deposit would invest in ECP. You can fund your way to Li-mean/Libor with very solid credits,” Eisenhardt continues (see chart).
Explaining the surge in supply of ECP, says Eisenhardt: “Banks are becoming increasingly capital conscious in Europe and more and more issuers are discovering the capital markets. CP is at the short end of curve, something you’re in and out of every day. It’s not like doing a bond issuance and walking away. It builds a company’s name recognition. And as money funds grow in Europe, this is the sort of stuff that they’re looking to buy.”
Financial sector issuers still dominate the market, but asset-backed issuance in ECP is growing considerably . Asset-backed commercial paper (ABCP) issuance grew over 90% in 2002 – replacing outstandings in corporate paper. Explains Eisenhardt: “there are more credit officers in money funds to evaluate and understand the structure. There is a big interest in putting euro-denominated assets into conduits and then funding them in euros, which you can’t do in USCP unless you rely on swaps.”
The advent of the euro can largely be thanked for the maturing of the ECP market. Those investors that remained at their borders to avoid currency risk, can now access different credits across Europe.
John Ford, director and ECP product manager at Deutsche Bank, expects the liquidity in euro-denominated ECP to increase further as a single market for financial services in Europe becomes a reality. At present euro outstandings are limited by regulatory and fiscal barriers which restrict distribution in a number of jurisdictions. For example, in France, Italy and Spain, non-domestic ECP is deemed to be unregulated because it is traded ‘over the counter” and not on a regulated exchange.
At the moment French money funds cannot put more than 10% of their assets in ECP, but the introduction of implementation of the UCITS directive in the next two years should result in a big boost for the ECP market. Ford, also chairman of the International Primary Markets Association ECP committee, is optimistic that the directive will be put in place in a practical manner in mid-2003. With France boasting the largest money market fund industry in Europe, the future of ECP is bright.