Text 8 Eurocommercial paper

Eurocommercial paper, like euronotes, consists of short-term negotiable debt instruments.

A company which wants to raise money by issuing eurocommercial paper will negotiate a programme with a dealer or several dealers. For a large programme, a company might find three dealers:

(a) a bank in the UK;

(b) a US bank, acting as a dealer for most of Western Europe (eg Germany);

(c) one of the leading Swiss banks, which will have contacts with many large investors.

There will be a borrowing limit under the ECP programme, but the corporate borrower has much more flexibility than with euronotes, and interest rates are 'market-driven' (ie much more subject to market influences, compared with the interest rate on euronotes, which is decided by the tender panel of banks).

The flexibility of eurocommercial paper arises because the borrower is able to choose the period to maturity (whereas euronotes are issued for a standard three-month or six-month period). For example, a company might decide that it wants to issue some new paper at the end of November, with maturity in the middle of March. However, if the interest rates that would be payable are not attractive enough at the time for this term of borrowing, the borrower can re-think and alter the term of the issue, and, say, decide instead to issue paper with a maturity in mid-February. Corporate borrowers are therefore able to 'play the market' and try to schedule borrowing for when they expect interest rates to be most favourable to themselves.

The advantages of eurocommercial paper are that:

(a) there is greater flexibility;

(b) interest rates are determined more by market conditions;

(c) a company that issues ECP does not have to be formally 'rated'. However, companies that are rated will be able to issue paper at finer rates;

(d) the costs of ECP programmes are less than underwritten euronote facilities.

Conclusion

Eurobonds, euronotes and ECP are examples of the development in recent years, from 'old fashioned' bank credit to pure commercial paper.

(a) Bank credit is finance provided by a bank, with the debt repayable to the bank. Given the large size of euronote or ECP issues, the equivalent form of bank lending to commercial paper has been the syndicate bank loan, ie a loan made by several banks in collaboration, to a single borrower.

(b) Commercial paper is finance obtained by an organisation issuing a debt instrument of its own, which is sold through banks to investors.

PART III

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