something to smile about? - Euromoney Institutional Investor PLC

MANAGING CASHSHORT-TERM DEBTHow are you fundingyour WCM needs?The CP market is the ideal short-term debt financing solution. Itis cheap for the issuer and low risk for the investor. But a fall inratings and economic stagnation has knocked the wind out ofCP and investor appetite. And, if CP is no longer an option whatare the alternatives? Robert Pink reports.Is the commercial break over forUS commercial paper?” That wasthe question raised by S&P inMarch 2002. The US commercialpaper market had undergone itslargest contraction in 40 years and theoutstanding market stood at $1.35 trillion– the lowest level since the lastquarter of 1999 and 6.1% down on theyear-end for 2001.“As business investment picks upsteam,” asserted a bullish S&P, “workingcapital requirements will accelerateamong firms, in turn fuelling increaseddemand for commercial paper.”Market players, hoping for goodnews, heaved a sigh of relief and lookedforward to a return to normality.Almost two years later the USmarket has further contracted toaround $1.3 trillion, although the Europeanmarket has continued growing.So what are the corporates using tofinance their short-term debt needs?Commercial paper, say banks.Why CP remains topCommercial paper is used by large corporates,with high credit ratings (andlow investment risk), to finance day-todayworking capital managementneeds such as accounts receivable andinventory. It is available in a wide rangeof denominations, can be either discountedor interest-bearing, andusually has a limited or nonexistentsecondary market. Maturities typicallyrange from two to 270 days. It is sold tomoney market funds, banks, institutionalinvestors and corporates.“Corporates have become increasinglylarge investors in short-termpaper,” says Arnaud Achour, head ofcorporate debt origination at SG CIB.“They have built up enormous stockpiles of cash as a consequence of theirdeleveraging efforts.”“The advantage [of CP] over bankfinancing – where interest rates mayfloat two to three per cent above thebase rate – is that the cost of borrowing[with CP] is at Libor flat or less,” saysColin Withers, managing director ofshort-term products at Citibank. It isalso flexible – allowing a company tomatch financing needs directly withcash flow. Libor stands for the LondonInterbank Offered Rate and is the rateof interest at which banks borrowfunds from other banks, in marketablesize, in the London interbank market.“Commercial paper offers a highgrade of flexibility and a very deep market,”says Norbert Mayer, head ofcorporate financing at the BMW Group.As head of corporate finance, Mayer isresponsible for corporate strategy onshort-term debt financing. BMW uses amixture of CP and the short-end of theMTN programme for its short-termneeds, says Mayer. “Having directcontact with the investors is part ofBMW’s funding strategy. Bank loans arenot that important for us.”For Mayer, commercial paper is stilla viable option, but the figures releasedby S&P suggest BMW is one of the fewremaining corporates to be able toaccess the market.Corporate ECP Issuance from 1 Jan 2002 to 1 March 2004Rank Issuer USD Eqv (at issue) m Trade %Share1 Unilever NV 81,100.34 1,134 8.332 E.ON AG 52,057.91 761 5.353 Eni Coordination Center SA 37,926.09 480 3.904 Coordination Center Volkswagen SA 32,643.47 1,604 3.355 KarstadtQuelle AG 26,058.33 1,521 2.686 Deutsche Telekom AG 23,472.18 851 2.417 DaimlerChrysler AG 20,514.38 997 2.118 RWE AG 17,368.86 387 1.789 Tesco plc 16,738.54 327 1.7210 METRO AG 16,711.12 792 1.72Total 973,440.10 31,145 100.00Source: Dealogic34 cf March 2004 corporatefinancemag.com