Definition
Euro Commercial Paper
Euro commercial paper (ECP or Euro CP) is a form of unsecured, short-term debt that is issued by a bank or corporation in the international money market. Notably, ECPs are denominated in a currency that is different from the domestic currency of the market where the paper is issued.
Note that the “euro” prefix does not imply that these debt instruments are denominated in euros. Rather, this concept is similar to that of eurocurrency, which represent deposits held in banks located outside of the country which issues the currency.
- Maturity: from 1 day to 1 year
- Currencies: EUR, USD, SEK, CHF, GBP;
- Nominal amount: An investment of a minimum amount of $500.000 (or the equivalent in foreign currency) is required. The minimum amount can be defined be each issuer on its programm
- Rate: fixed or variable (indexed to EONIA for example). The rate is freely set between the issuer and the investor. No coupon is paid between the issuing and the repayment. However, they may be issued at a price different from the nominal value or include a redemption premium.
Presentation of the actors
All of them enjoy market stability, liquidity and competitive financing terms.
Issuers
They issue paper to obtain funds for their cash requirements. Issuers can be divided into financial and non-financial companies, although most are the former.
Dealers/Brokers
The intermediaries are in charge of the liquidity of the market. They conciliate issuer’s financing need to investors investing interests by negotiating on both sides – they act as intermediaries in the negotiation of the characteristics of the issue. There are two types of intermediaries:
– Dealers which are banks. These are the main intermediaries. They can either buy the paper to resell it immediately to an investor or keep it in their book for later resale.
– Brokers connect the issuer and the investor in order to allow a transaction (brokerage). They don’t have the right to keep a Commercial Paper in their book.
Investors
ECP’s investors are mainly money market funds that go through asset managers to make cash investments in EURO CPs. These funds are mostly European. Some corporates buy also ECPs to optimize their cash flow.
Rating agencies
Rating agencies assess the risk of non-repayment by issuers in order to help negotiate the rate. The 3 primary rating agencies working on ECP are Fitch Ratings, Moody’s and Standard & Poor’s.
Guarantors
They guarantee repayment If the issuer defaults. They intervene when an issuer is not rated by a rating agency.
Arrangers
Arrangers support and assist the issuer. They are credit institutions with specialized expertise in this type of program.
Clearers
Clearstream, Euroclear Bank or DTCC. The EPIM platform allows dealers to allocate directly ISIN codes to the transactions they made on primary market.
Regulator
Most ECP are regulated by English law.
Process of creation of a EURO CP
1- Introduction to the market
To become active on the market, a new issuer must create a program. This program could be public and includes the company’s terms of issuance, such as its ratings, guarantors, paying agents, etc.
A new issuer is often accompanied by an arranger that helps better understand the market and take the first steps on it. This arranger can be an advisory firm or a market player (an issuing and paying agent or a dealer/broker).
2- Expression of need and negotiation
An issuer will contact the dealers / brokers of its choice indicating the amount he wishes to borrow and its rates. Intermediaries can either buy the commercial paper to resell it to investors or keep it in Book.
Depending on the liquidity of the market, the negotiations can be a lasting process, and each characteristic of a commercial paper can be renegotiated.
Requests and offers may also come from investors or dealers / brokers who wish to buy EURO CP even if the issuer does not currently sell it.
3- Debt instrument creation
The issuers will send a confirmation to their IPA. The latter will request an ISIN code to Clearstream or Euroclear Bank, in order to identify the newly issued ECP. The dealers can also allocate an ISIN code via the EPIM system.
Different confirmations are also sent between the back offices of the various parties of the transaction (investors, dealer, broker, etc).
And with Onbrane ?
Our ECP Stories
Maybe soon on netflix
