something to smile about? - Euromoney Institutional Investor PLC

Norbert Mayer, BMW: “Commercialpaper offers a high-grade offlexibility and a very deep market.Having direct contact with theinvestor is part of BMW’s fundingstrategy. Bank loans are notimportant to us.”Bank ECP Issuance from 1 Jan 2002 to 1 March 2004The ratings game“The decrease [in the market] has beendue to three factors,” says Steve Huntley,head of money markets at Bank ofAmerica. “Firstly, issuers ‘terming out’commercial paper balances in the longtermdebt market; secondly, decreasingneeds for working capital management;and thirdly ratings downgrades.”Commercial paper is only issued bylarge corporates with high credit ratings– BMW has short-term debt ratingsof A-1 from S&P and P-1 from Moodys –the best short-term rating it offers.Large multinationals with an A1-P1rating, such as BMW, often use both theEuropean and US commercial papermarket. That gives them access to apotential investor base of $6 to 7 billionin short-term debt in this year’s market.“The only risk for corporates raisingmoney in the short-term debt marketsis if the market closes,” says Achour. “Inthe past there have been some corporateswho have relied too heavily on theshort-term finance markets. They havethen been faced with liquidity problemswhen downgraded because themarket had closed on them.”Withers agrees: “An A2-P2 issuer canstill get $2-3 billion in the US marketsbut once a company starts a ratingsslide the availability of funds dries up[investors will start backing out] and itslides into bank financing at moreexpensive borrowing rates.”In 2002 Tyco lost a reported $400 millionafter losing the confidence ofinstitutional investors in itscommercial paper programme.Amid investor concerns aboutaccounting at the firm, the conglomeratehad to draw on a backup line ofcredit from its banks to come up withthe cash it needed. The move to replacecheap commercial paper with the moreexpensive bank line cost Tyco about$400 million in additional after-taxannual borrowing expenses, slicingabout five cents per share from firstquarterearnings, which were expectedto come in at 80 cents per share. Accordingto Withers, the ratings slide beganlong before Tyco’s accounting troubles.In January 2001. “There were a few surprisesfrom Californian utilitiesfollowed by downgrades in the telecomsand automotive sectors.”Prominent US issuers ofcommercial paper programmes downgradedin 2003 would be too numerousto mention, but they include Cargill,Eastman Chemical, Carnival andSchering-Plough.“In the corporate bond market if youlose one notch rating you will still haveaccess to the investors, but in the commercialpaper market you could end upRank Programme Dealers USD Eqv (at issue) m Trade %Share1 Deutsche Bank 10,153.29 1,507 13.412 Citigroup 9,192.56 1,330 12.153 Barclays Capital 7,583.72 1,274 10.024 UBS 7,262.38 1,141 9.605 JP Morgan 5,188.88 918 6.866 Goldman Sachs & Co 5,185.36 820 6.857 Royal Bank of Scotland 5,020.43 759 6.638 ING 3,410.30 800 4.519 Credit Suisse First Boston 2,381.00 516 3.1510 Lehman Brothers 2,343.23 465 3.10Total 75,686.62 2,102 100.00Source: DealogicTHE CF GUIDE TOSHORT-TERM DEBT»Operating term loans: used forworking capital management to coverinventories, monthly expenses, interest onoutstanding loans, rent, utilities, leases.»Revolving lines of credit: a creditfacility which allows the borrower, withina credit limit and for a set period, toborrow or repay debt as required.»Revolving loan: a loan where theborrower decides the number and timingof withdrawals against the bank loan; anymoney repaid may be re-used at a futuredate. (A line of credit where the customerpays a commitment fee and is then allowedto take and repay funds at will. It is usuallyused for operating purposes, fluctuatingeach month depending on revenues andexpenditures.)»Commercial paper: used bycorporates to issue short-term IOUs forshort-term financing – lasting up to 270days or just one day only. Commercialpaper invariably doesn’t require anyguarantees and is the cheapest source ofdebt financing. Rates are typically belowlonger-term bonds and loans from banks,largely because it is less risky to lendmoney for such a (relatively) short timeperiod in which it is so much easier topredict the fortunes of the company.being completely cut off, especially onnon-domestic programmes,” saysAchour.“The majority of short-durations arepooled vehicles, generally rated AAA,and we have to invest a largepercentage of our cash in higher ratednot lower rated vehicles,” says WayneBowers, the director of global fixedincome at Northern Trust GlobalInvestors (NTGI). “If you look at the costclientmandate we manage, one of therequirements is the ‘preservation ofprinciple’. If you have money held inthe short-term the last thing you wantis to suffer a fall in your investment. Thelevel of risk on duration and the riskperspective is very limited.”Not all domestic markets are as strictas the US market. “TheEuropean market is more forgiving,”says JC Perrig, Bank of America’s headcorporatefinancemag.com March 2004 cf 35