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Commercial Paper – alternative short term funding
| 03-01-2018 | treasuryXL |
There are many different products that a company can use to meet its funding requirements. These products mainly fall into (but are not exclusive to) 2 major categories – equity or debt. Within both categories that are many different bespoke products that can be used. Debt can be either for long term or short term – both in respect to the tenor and the interest rates. Furthermore, interest rates can be fixed or floating. In this series we shall be looking at popular products that are used to help fund a business.
Definition
Commercial Paper is a money market product issued by large companies to receive funding for short term needs. The tenor (maturity) is normally for a short period up to 270 days. The paper is a promissory note that is unsecured – there is no collateral/security offered against the paper. As such Commercial Paper is normally only ever issued by large well-known companies who have credit ratings.
How it works
When a company needs short term funds it can issue paper (promissory note) against receiving the funds. Issuance can take place either via a recognized dealer who can sell the paper into the money markets, or paper is directly issued to an investor who wishes to buy and hold the paper until maturity. Paper is normally issued at a discount to its face amount and redeemed at par.
The programme
Commercial Paper is subject to a company issuing a programme. This provides details as to the maximum amount that can be borrowed; the lifetime of the programme; registered dealers etc.
Why borrow?
Commercial Paper allows a company to be flexible in its short term funding. Yields are, traditionally, lower than bank borrowings and are not subject to additional bank covenants. A company can benefit quickly from changes in interest rates. It is both a quick and inexpensive way to raise short term working capital.
Why lend?
It allows lenders to get a better yield than available if they placed their funds on deposit with a bank. The paper is negotiable – this means that the paper can be sold on in a secondary market. If a lender suddenly had a funding issue, they could sell the paper to a third party, rather than approaching their bank for funding. As the issuers have credit ratings, it is possible to apply your own criteria with regards to who you will accept as a counterparty.
Lionel Pavey
Cash Management and Treasury Specialist
Bitcoin mania: what is it not?
| 20-12-2017 | Carlo de Meijer |
Bitcoin rate explodes
Since April this year the Bitcoin (but also crypto currencies like Ether and Bitcoin Cash) is showing a continuous rising trend and in the past few months it even exploded to unexpected levels. In one month time the rate of the Bitcoin almost doubled. In the meantime the Bitcoin rate increased further to reach almost 20.000 dollar, before falling back to 16.000 dollar. But now it is back at 19.000 dollar. At the beginning of this year the Bitcoin rate was not even 1000 dollar. The total market capitalisation of Bitcoin is now exceeding that of a company like Boeing and that of New Zeeland’s GDP.
Bitcoins traded on futures market
The recent firm rate rise of the Bitcoin has much to do with the launch of Bitcoin future contracts. Before that Bitcoins could only be sold or bought via internet platforms. Last week the trade of future contracts in Bitcoin started on the Chicago Options Exchange ( CBOE). These futures enable speculators (without having Bitcoins) to buy or sell Bitcoins by betting via the leverage instrument on future increases of the Bitcoin or an eventual decrease thereby hedging against fluctuations. In total 500 contracts were traded on the first trading session. The rate of Bitcoins increased nearly 2.000 dollar to 18.700 dollar. On the American market place Coinbase the Bitcoin even reached 20.000 dollar, after having raised 40% in the two previous days. This indicates that investors do not (yet) expect a crash short term.
In the meantime also the Chicago CME, the world’s largest exchange, started trading Bitcoin futures and the Nasdaq is also in the race to enable the trade in these future contracts. Many professional investors however did not yet enter this market because the difference between bid and offer rates is still much too large. This indicates there is too less liquidity in this market. There is also insufficient clarity of the required margins, trade limits, stress tests and clearing.
What is Bitcoin not?
Read the full article of our expert Carlo de Meijer on Finextra
Carlo de Meijer
Economist and researcher
Credit ratings Healthcare- a Fitch seminar
| 19-12-2017 | Lionel Pavey |
On 29th November treasuryXL attended a seminar organized by Fitch Ratings in Utrecht. It was a presentation by Fitch that explained the approach they had taken to determine credit ratings for 2 different entities within the Dutch healthcare industry: Stichting Elisabeth-Tweesteden Ziekenhuis in Tilburg – a hospital, and Stichting GGZ Noord-Holland Noord – a mental healthcare institute. There was a fair amount of interest in this seminar as more than 35 people attended, representing banks, financial advisors, healthcare industry and insurance companies.
Whilst both entities are in the healthcare industry there are distinct differences in focus and size: Elisabeth-Tweesteden caters to the surrounding area and had 632,000 hospital visits in 2016 and 4,000 FTEs, GGZ has 10,000 patients and 1,240 FTEs.
What is a credit rating?
A credit rating agency (Fitch) attaches a credit rating to an entity (debtor). A rating is an opinion as to the entity’s ability to meet financial commitments on a timely basis. It measures the ability of the debtor to repay principal and interest of loans on time and in full, together with the probability of default. To be able to come to a conclusion for the rating, the entity needs to supply all relevant information to the rating agency, which can then perform the necessary analysis to judge their creditworthiness.
Applying the criteria
Fitch uses two criteria to rate healthcare entities: the recently updated Government Related Entities Rating Criteria (currently published as an exposure draft) and the Revenue Supported Debt Rating Criteria. The first determines the likelihood of exceptional support in the case of financial difficulties at the Government related entity. The latter determines the Standalone Credit Profile.
An entity is defined as being government related if they are semi-publicly owned/controlled by the government and/or local authority has majority economic or voting control over the entity. Fitch assesses whether a government is likely to support an entity in financial distress to avoid negative socio-political repercussions of a default, or if the entity fulfills an important public policy mission. The Government Related Entity Criteria covers four key factors:
In order to determine the Stand-alone credit profile the Revenue Supported Debt Criteria is used that covers revenue defensibility, operating risks and financial profile. Fitch concluded that both entities were able to receive a long-term credit rating of single A.
For investment grading criteria, Fitch applies a highest rating of AAA and a lowest rating of BBB-. A single A rating is a high credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
What are the advantages of a credit rating?
What are the implications in the Netherlands?
At present, the Dutch government has majority control in many companies including transport – NS; infrastructure – Prorail, Schiphol; energy – Gasunie, Tennet; and financial services – BNG (Fitch rated AA+, Stable, FMO (Fitch rated AAA/Stable). Furthermore local authorities also have majority control in local companies including transport – GVB, HTM, RET, energy – Eneco, and household waste – AEB, HVC. All the companies require funding, the majority of which is covered with either a national or local government guarantee, or direct participation. Fitch rates all types of government related entities, and with a rating it may be possible for these entities to further their scope for acquiring finance.
An important question that arises is: should national and local government restrict themselves to issuing guarantees and allowing the free market to determine the funding, or should they proactively engage in lending money to companies? Only if more entities were in the possession of a credit rating, could a clear decision be taken. At a time of low interest rates and a shortage of “prime” graded loans, it could possibly be advantageous if the loan market could be opened to more lenders – secure in the knowledge that the loans were guaranteed.
If you are interested in learning more, please contact us via email at [email protected]
Cash Management and Treasury Specialist