Ten years ago Credit Suisse First Boston (CSFB), Morgan Stanley Dean Witter (MSDW) and a host of other big investment banks deserted the Euro-CP market. Since last year they have come galloping back, and are hoping to upset, if not topple, the houses that were brave enough to stay. But the only way they can compete is by cutting fees, according to the existing banks, and the competition could turn an already less-than-profitable market into one that collapses under its own weight. But the reasons for coming back are clear. The Euro-CP market has grown by 50% over the last 18 months. Issuers are frequently using the same dealers for their Euro-CP programmes as they have on their Euro-MTN facilities. And European corporates flooding to the capital markets are often using the liquid Euro-CP market as a stepping stone. CSFB was the first of the absconders to return. It poached four people from Barclays Capital in June last year to run its short-term products desk. So far this year it has been appointed as a dealer on 15 new programmes, equal fourth with UBS Warburg, and has 5 more arrangerships in the pipeline. Louise Mason, hired as head of ECP origination seven months ago, says: "With borrowers increasingly looking to manage their CP funding in the US and ECP markets, Europe was clearly a big gap for us. And by hiring a complete team simultaneously we were up and running very quickly." This may have perturbed some of the more experienced banks but Sam Cowan, head of ECP trading at UBS Warburg, says: "Banks rejoining the market was always going to happen. ECP has long been overshadowed by the US market, so I think those that have returned saw a potential here for macro-scale growth opportunities." But the likes of Citibank, Deutsche Bank and Goldman Sachs, the top three this year in terms of new dealerships, according to CPWare, will not be enjoying the competition. Especially when the easiest way to gain dealerships is to cut, or even waive fees. Dresdner Bank has only just decided to move away from its traditional German corporate issuers. It hired Michael Stump, in London, as head of Euro-CP origination in August. He says: "The ECP market tends to be viewed by dealers as a platform for building an early relationship with new issuers. If we only had six or seven banks with significant market shares it could be more profitable, but at the moment fragmentation and heavy competition are eroding margins for the dealers." Cowan, at UBS Warburg, is unconcerned though. He says: "Undercutting your rivals is a short-term tactic for gaining market share. It does make it slightly more difficult for those houses already established, but I don't think it will impact us in the long run." Even Mason, at CSFB, agrees that the market they have just entered is not the best profit maker. She says: "The lack of profitability is a big concern, but it has existed for a long time. Large dealer groups and fierce competition in Europe do not help and we are actively promoting some of the programme management practices from the US CP market over here." The US market is considered the role model for Europe, and one of the main dealers over there is MSDW. It had to deflect some cutting remarks when it announced its re-entry to the Euro-CP market (see MTNWeek, issue 166), but eight dealerships off new programmes this year have pushed it into the top 10. The difference is that in the US there are three established dealers - Merrill Lynch, Goldman Sachs and Lehman Brothers - who are consistently paid a dealer fee of four or five basis points. This discipline is lacking in Europe. Plus, issuers are starting to issue direct to investors more often. Cpmarket.com, a website founded by big issuers such as Ford, GECC and GMAC, has been running in the US market since May this year. It aims to expand into Europe too. Stephanie Sfakianos, head of Euro-CP origination at Deutsche Bank, says: "Following the trend in the US, the highest volume financial sector issuers have started issuing direct, and the exclusivity of dealers is lessening." This means new banks can access issuers via reverse enquiry trades. "This is where existing dealers may lose out," Sfakianos adds. But only the biggest and most committed issuers are likely to place their own paper. MSDW is arranger and a dealer on Tesco's £
October 27, 2000
