The first Euromoney Euro-CP conference was held last week in London. It attracted the biggest names in the business and sparked some interesting debate about the future of the Euro-CP market. The two panels were hosted by Morgan Stanley Dean Witter (MSDW) and Citibank. And despite a somewhat unsteady CP market at the moment, enough delegates were taking time away from their offices to fill every seat. MSDW's discussion compared the US and Euro-CP markets, and focused on how Europe needs to change if it is to reach the US's level of liquidity. Robert Bonafide, global head of continuously offered products at MSDW, started by looking at what is driving the growth in Euro-CP. M&A activity and the integration of what used to be fragmented CP markets were listed as the main reasons. More short-term assets available for investment and more US-style money market funds have also contributed to the growth. But Eugene O'Shea, head of Euro-CP trading at MSDW, thinks Europe has a long way to go. He said: "In the US, corporates and the asset-backed sector are very big. They rely on US CP daily, and it's a much more active relationship between dealer and borrower." And Trisha Ostergaard, head of short- and medium-term fixed income investor services at MSDW, agrees. She noted the importance of a same-day market, especially for consolidation. She said: "Sometimes an issuer will need to raise $10 billion in one day. You need to be sure you can get these funds, and same-day settlement is the way to do it." The panel, which included two investors: Jonathan Curry, cash strategist from Barclays Global Investors (BGI), and Alison Briggs, portfolio manager from Deutsche Bank, was optimistic that progress was being made. Ostergaard continued by commenting on the influence of US funds in Europe. She said: "US funds are coming to Europe and will push for same-day settlement. This will bring enormous liquidity to the market. But going forward things will become more global. More people will use both markets with a more credit-driven approach." The value of an overnight market and what made a good counterparty were also discussed, but each topic kept reverting to what needs to be done to maximize the Euromarket's potential. Curry, at BGI, said: "The ability to settle trades same day is crucial and I would also like to see smaller ticket sizes and a standard sub one-month market." And Briggs, at Deutsche Bank, said: "One of the problems is that sometimes a dealer won't make a price. But pricing is very important because sometimes we send out evaluations every week." O'Shea, at MSDW, thinks there are other things to consider. The growing issuer base in Europe is not being matched by the investors, and all sides need to work towards a balanced market. He said: "The investor base is not what it could be. Dealers need to have more dialogue with their issuers, but it is also up to the issuer to run their facility responsibly and to be involved in developing a deep investor base." Citibank's panel looked at the influence of rating downgrades on an issuer's ability to borrow, and how a poor credit rating can drastically affect liquidity. Colin Withers, head of Citibank's short-term products, opened the discussion saying: "There have been some serious credit events happening in the CP markets, for example in the auto and telecom sectors. The A-2/P-2 sector has suffered from volatility, and though it's just about getting back on track, investors still consider pricing of this paper an art, not a science." This causes swings in the prices of notes, which makes the liquidity of the sector variable. Withers went on to explain the frustration the industry feels at being dependent on the agencies. He said: "The rating agencies are a law unto themselves, and they surprise me sometimes with their activity. But love them or hate them, they have the power to make investors listen." The influence the agencies have is driving some issuers out of the market. Teollisuuden Voima (TVO), an A-2/P-2 issuer that was downgraded from A-1/P-1, signed a $100 million Euro-CP programme in 1988. But TVO did not use the facility until 1998 and has now abandoned it altogether. Pekka Altonen, finance manager at TVO, said: "Our domestic Finnish market is much more attractive. The Euro-CP market is 10 to 15 basis points more expensive." And James Hennessy, global money market origination at Citibank, thinks the impact on issuers is greater than some are willing to admit. He said: "Because of downgrades two-thirds of issuers have drastically reduced their outstandings in Euro-CP because of the loss of liquidity." The fact that the delegate from Imperial Tobacco, rated A-2/P-2 and suffering from litigation problems, did not turn up for the panel session shows how sensitive an issue this can be. And Katherine Cooney, global money market origination at Citibank, is keen to keep as many investors educated as possible. She said: "We lean very hard on corporate investors, because when the other funds walk away you need to rely on these smaller ones." But the panel ended on a positive note. A-2/P-2 issuers are now getting levels of around Libor+10 bps, and Conoco claims to be able to get Libor+3. Withers, at Citibank, said: "There have been a lot of ripples in the market but at last we seem to be coming back to normality."
March 30, 2001
