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Commercial Paper – alternative short term funding
| 03-05-2018 | treasuryXL |
Instead of just relying on banks to provide short term funding, large corporations are also able to access the European Commercial Paper market (ECP). This is an alternative market that can assist in meeting short term funding requirements. This provides a good alternative to products previously mentioned – such as lines of credit. In this article we shall look at what ECP is, how it can be issued and what the market for this paper is.
Definition
Commercial Paper is a promissory note that is unsecured with a maturity shorter than 1 year. A corporation will, initially establish a CP programme which determines the terms and conditions – such as maximum allowable issuance amount, termination date of the programme or open ended, currencies, bank dealers etc. The issue is subject to a credit rating and the paper is rated. It is also possible to issue your own paper instead of through a dealer, though this is not used as much.
Issuance
The issuer has 2 approaches: issuing paper as and when funding is needed, or being informed by the dealer that there is demand from the market for additional paper. As the paper is negotiable, clearance and settlement is provided via one of the major clearing houses – Euroclear, DTC etc. Settlement is the same as a spot transaction – taking place two working days after transacting. As ECP is in competition with other forms of short term investment, it is necessary to have an active presence in the market – lenders need to know that there is demand for their funds and issuers are in direct competition with other issuers.
Use
ECP allows issuers to fund themselves in a more flexible manner than traditional bank lending – this can be seen in both the issuance amount and the tenor of the paper. Issuers with the highest credit ratings can often achieve funding below the cost of Euribor/Libor. This allows issuers to fund a significant portion of their total funding requirements on a short term basis. As short term rates are normally lower than long term rates, this leads to a reduction in the average cost of funding. An ECP programme for as little as EUR 250 million can be established, though it is more common to see programmes for more than EUR 1 billion.
Motivation
An issuer needs to ascertain that there is a definite funding requirement and that an ECP programme can successfully be utilised. There are ongoing costs involved, so it is not just a question of setting up a programme and then leaving it there in place without using it.
An issuer needs to know if there is a true appetite in the market for their paper. No issuer wants to find that having established a programme that there is no demand for their paper.
How does the short term funding fit into the funding requirements of the issuer on the whole? Not only do they get access to cheap funds, they also gain access to potential borrowers who could be interested in supplying alternative long dated funding.
Conclusion
ECP offers a lower cost of funding, flexibility in both issuance timing and maturity, and is unsecured. As the paper is tradable, investors can always sell their paper on in the secondary market. This must be weighed up against factors such as cost of programme maintenance, reduction in lines of credit, and the fact that only top rated issuers are accepted.
For large corporations an ECP programme is attractive, but needs constant maintenance and attention. It offers an attractive bespoke alternative to traditional bank funding.
If you have any questions, please feel free to contact us.
Brexit – the impact on your business
| 02-05-2018 | Lionel Pavey |
As the negotiations between the EU and the UK get ever more complicated, there is a strong possibility that rather than a hard or soft Brexit there will be no agreement whatsoever. For businesses that either export to the UK or import from, this could have a fundamental impact on their survival. The Netherlands exports goods and services to the UK with a value in excess of EUR 40 billion per year; more than 200,000 jobs are directly linked with trade to the UK; Dutch capital investment in the UK is more than EUR 180 billion. We take a look at some of the key areas where business could be affected from the viewpoint of cashflows.
Foreign Exchange
It is not known how many Dutch companies actively employ a hedging policy. If GBP was to significantly get weaker, demand in the UK might fall or lead to more contracts having to be settled in GBP. However, at the same time, Dutch companies relying on components from the UK could see their suppliers having their profit margins squeezed – potentially leading to problems in maintaining and fulfilling existing contractual obligations. The biggest concern would involve increased currency volatility. If EUR/GBP does become more volatile, this could lead to clients in the UK shopping further afield to obtain the goods and services they require – leading to a drop in exports for the Netherlands. What are the alternatives available – banking in the UK; offsetting existing supply chains by changing components with UK firms etc?
Funding
At present, the UK receives EU funding and this can be the basis for investment decisions regardless of the location of the business. As this will stop when they leave, there will be an impact on companies that have a multiple presence in both countries. Changes in regulations will bring extra complexity, restrictions and possibly affect the profitability of existing business arrangements. The immediate loss of passporting rights for financial services should not be underestimated.
Supply Chain
All existing supply chains operate under the premise of the single market, with no internal quotas or tariffs. The initial affect will be seen by the imposition of trade barriers, caused by a new trade agreement. This does not just extend to trade tariffs, but also to the implementation of VAT (BTW) on B2B transactions. The dairy industry is one that could be hit especially hard. EU tariffs for non-EU countries are as high as 45 per cent on some dairy products.
Non trade barriers are also a threat – different technical standards, labelling, compliance, together with extended delays in the shipment process (as goods will need to be inspected) will add to both the cost and time of trade.
KYC
All parties will be affected – but do you know what the position is of your clients in the UK? What are their pain thresholds; are they seeking alternatives markets; are they looking for alternative suppliers; how resilient are their logistical chains to change; how will changes in law and regulations affect their operations?
There are a myriad of unanswered questions that need to be addressed – one on one – with every counterparty.
What to do
It is imperative that companies perform a Quick Scan as soon as possible to try and evaluate what their exposure is in the UK and what percentage that makes of all trade for a company. Having ascertained the exposure, it then becomes necessary to stress test the processes and try to model the results on the company by inputting new variables.
With less than 1 year to go, you will need to start very soon!!
Lionel Pavey
Cash Management and Treasury Specialist
Make room for the treasury controller!
| 01-05-2018 | Pieter de Kiewit |
Over the last few years, many corporates have been quite frugal in their investments, also in treasury. Times were hard. Now funds are getting available, there is willingness to hire, also treasury controllers. The rising investments in treasury IT, also related to aforementioned funds, often leads to less work for the back office and possibly also the front office. Platforms like 360T or FXAll are examples, but also algo trading. Choosing the system and taking care of what it should do and what it actually does, is often one of many tasks of the treasury controller.
The chaos in the financial markets made regulators increase the number of rules that banks and also corporates have to follow. Furthermore companies expanding globally, and funding their subsidiaries have to following strict internal and external (fiscal and banking) rules. Implementing this framework and being compliant can also be an important task of a treasury controller.
F&A and corporate treasury have been quite well at co-existing in separate worlds and not bothering each other. F&A wants to be in control and appreciates predictability. Treasury is motivated by the dynamics of the markets and adrenaline. But companies integrate functionalities and the treasury controller will build the bridge.
Now why is the search quite hard? First of all because of the drivers mentioned in the last paragraph: the treasurer does not like too much predictability and the controller does not (want to) understand the financial markets. And having thorough knowledge of several functionalities: bookkeeping, IT, regulatory and risk management and make them work well together is not easy. Finally not many corporate treasuries are big enough for a qualified treasury controller. This leads to well paid Big4 auditors and bank controllers. And us having search assignments. Any thoughts and are you interested?
We would like to hear from you,
Pieter, Heleen and Kim
Pieter de Kiewit
[email protected] / +31 6 1111 9783
Pieter de Kiewit
Owner Treasurer Search