Last year was a bonanza for the Euro-CP market in terms of new signings. This year things have settled, except when it comes to US corporates. A new US name has joined the market in every month in 2000 up to and including July and many dealers think it will continue for some time. Stephanie Sfakianos, Euro-CP origination, at Deutsche Bank, thinks the advent of a single currency is partly responsible. She says: "The euro has given the market a great deal of credibility and people want to feel involved." But though the consolidation in Europe has made the market more attractive to US borrowers with local currency funding needs, it is possible that issuers are being pushed out of the US rather than sucked into Europe. The Financial Accounting Standards Board's (FASB) rule 133 means all US corporates must separate the underlying derivative of the notes they issue from the actual debt. Transactions must be reviewed and marked to market on a regular basis (see MTNWeek, issue 150). This means that issuers wanting to place structured paper will hesitate, and instead of using swaps will issue directly in the currency they need. And given the US market's success in attracting issuers in the past, new names have to be exceptional if they are to stand out. For some, competing with the large US asset-backed facilities comes second place to the less crowded European market. Barry Gartner, director at Barclays Capital (Barclays), says: "The US market has grown and now has outstandings of about $1.4 trillion. A high proportion of this growth has been fuelled by issuance from asset-backed securities. By accessing Europe as well as the US the issuers involved can ensure a wider investor base." But Euro-CPs are not yet the perfect funding instrument for US corporates. GMAC signed its euro7.5 billion ($6.75 billion) programme in April this year and has raised the equivalent of $2.44 billion, but a spokesman for the motor company says: "Euro-CPs provide a very diversified source of funding and a different investor base, but they are still not as cost effective as US CP." This is because investors are prepared to pay more in the highly liquid US market. This poses a dilemma for US issuers who are keen to diversify their investor base and avoid FASB rule 133. Sfakianos, at Deutsche Bank, which is a dealer off General Electric Capital Corporation's (GECC) $5 billion Euro-CP programme, says: "The rationale of an issuer such as GECC, with enormous funding needs and an interest therefore in tapping every investor market, is very different to the rationale of the issuer looking for arbitrage. And I do question whether these smaller issuers will actually find the Euro-CP market cheaper." One issuer that is very pleased with its new Euro-CP programme is Conoco. The US oil and gas refiner joined the Euro-CP market in June this year when it signed a euro500 million facility via Deutsche Bank. It has $349.36 million outstanding off 20 trades. But as an A-2/P-2 rated borrower things could have been different. Louise Mason, head of MTN and Euro-CP origination at Credit Suisse First Boston (CSFB), says: "The A-2/P-2 sector has improved significantly but we need more credit buyers in Europe. Most investors are still reluctant to move outside the A-1/P-1 bracket." But Brian Mullen, head of capital markets at Conoco, disagrees. He says: "What we are seeing in Europe is more appetite for risk. The investment community and pension funds are looking to take added risk because they are competing with the US market." But if US borrowers continue to join the market with this regularity the investor base in Europe may not be able to accommodate them all. Sfakianos, at Deutsche Bank, says: "One of the problems is that the euro liberalized the playing field for issuers much quicker than it did for investors. Another is that we don't have a single clearing system yet, and what we do have is not very sophisticated." A Euro-CP operations working group has been encouraging a unification of the clearing systems. Mason, at CSFB, says: "In an ideal world we would have perfect links between all the clearing systems so we can move securities around at will and have same-day settlement. ECP can already be transferred between Euroclear, Clearstream and Sicovam, the process just needs to be much more automated." Withholding tax in countries such as Spain and Portugal is also a problem. And a single market for trading Euro-CP will only come about if investors can be sure of getting just as good a deal offshore as they would domestically. Gartner, at Barclays, thinks another 10 US corporates could join the market in the next year. He says: "If the market is going to support these new programmes we need to work harder on investors to ensure liquidity. We need to work towards a regulated CP market that the money funds of Europe can access and we need to eliminate the two-day market to make comparisons with the same-day market in the US easier." Despite the complaints from dealers, US corporates are very willing to place their debt in Europe. Of the 16 corporate signings this year seven have been from the States. Terry Moore, director of money markets at Conoco, says: "The Euro-CP market is still in its infancy. It is strategically sound to be part of a market that's growing."
August 18, 2000
