Corporate borrowers, who have benefited during the financial crisis as investors have fled financial institutions and some sovereigns, have plenty of opportunities for short term funding. But one that has been neglected by many is commercial paper. Ignoring it is a mistake, as hunger for corporate paper means that the pricing is compelling.
And some corporate treasurers are now coming round to the value of commercial paper. In May 2011, corporate CP borrowing reached its highest month-end volume since June 2009. It has been growing steadily over several months, reaching $61.1bn on May 31, according to Dealogic.
"Its a very attractive form of borrowing for corporate issuers because investors snap up corporate paper issuers can get very good pricing," says Marie-France Guay, director in ECP origination at Barclays Capital in London.
Many corporate borrowers dont use CP because of the nature of their funding needs. They often need to borrow in large chunks and for long durations. For working capital purposes they have often turned to the bank market, where they can raise revolving credit facilities at attractive levels.
But two factors could make the CP market a contender for this kind of funding. Increased regulatory pressure on banks to control their lending will make financing in the bank market more expensive. Secondly, CP investors have reduced the number of names they will buy in the sovereign and financial institution sectors, creating even more demand for corporate paper.
Many investors, especially money market funds, are very averse to any names with a bad smell around them, meaning that many banks and even sovereigns or agencies in peripheral Europe, for example, are off the list. These investors have piled into the safe SSA names, but yields there are miniscule.
"Corporate borrowers are the new sovereigns," says Peter Eisenhardt, head of short term fixed income origination at Bank of America Merrill Lynch in London. "They trade really well."
Corporate paper offers important diversification, and, even better, their performance is often decoupled from their sovereigns woes. "Whenever we talk to salespeople and traders theyre on the look-out for corporate paper," says Guay at Barclays. "Theres great demand out there for names in the A2-P2 bracket and above."
One of the latest corporate entrants to the market is Spains Enagás, which launched a Eu1bn programme on May 6. Banesto is providing treasury functions for the Spanish gas transporter."Enagás will use it as an efficiency tool of funding and as a new instrument of capital market access," Wafi Saleh, head of structured and short term funding at Banesto, told EuroWeek after the launch.
The funding levels on offer are highly attractive, and a programme is easy to maintain. It is not as expensive or complicated as maintaining an MTN programme, for example. "It is simpler than bond documentation as the majority of programmes are not listed and incorporate most financial information by reference." says Guay. "Once it is established, ongoing costs are attractive to issuers and relate mostly to maintaining a rating and issuing and paying agent fees."
On top of this, because of the rarity of corporate paper, borrowers dont always need to be regular issuers if they have good name recognition with investors. Attractive as the market is, however, borrowers are so well funded that growth in volumes could be slow. "Corporate volumes arent low because of lack of interest or demand," says Eisenhardt. "A lot of corporate borrowers have over-borrowed. Theyre full up on funding."
Nonetheless, as bank funding continues to become more expensive, CP will increasingly be seen as a viable alternative for working capital funding. CP originators report that enquiries from corporate treasurers are on the rise. Borrowers cannot completely cut their ties with banks, though. They still need them for CP backstop facilities, which are more expensive than before the crisis.Savvy treasurers will not quickly forget the lessons of the financial crisis, one of which was the importance of having a variety of funding options at ones disposal. CP is cheap to set up and cheap to maintain. That makes it a useful weapon in the arsenal.