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Norbert Mayer, BMW: “Commercialpaper offers a high-grade offlexibility and a very deep market.Having direct contact with theinvestor is part of BMW’s fundingstrategy. Bank loans are notimportant to us.”Bank ECP Issuance from 1 Jan 2002 to 1 March 2004The ratings game“The decrease [in the market] has beendue to three factors,” says Steve Huntley,head of money markets at Bank ofAmerica. “Firstly, issuers ‘terming out’commercial paper balances in the longtermdebt market; secondly, decreasingneeds for working capital management;and thirdly ratings downgrades.”Commercial paper is only issued bylarge corporates with high credit ratings– BMW has short-term debt ratingsof A-1 from S&P and P-1 from Moodys –the best short-term rating it offers.Large multinationals with an A1-P1rating, such as BMW, often use both theEuropean and US commercial papermarket. That gives them access to apotential investor base of $6 to 7 billionin short-term debt in this year’s market.“The only risk for corporates raisingmoney in the short-term debt marketsis if the market closes,” says Achour. “Inthe past there have been some corporateswho have relied too heavily on theshort-term finance markets. They havethen been faced with liquidity problemswhen downgraded because themarket had closed on them.”Withers agrees: “An A2-P2 issuer canstill get $2-3 billion in the US marketsbut once a company starts a ratingsslide the availability of funds dries up[investors will start backing out] and itslides into bank financing at moreexpensive borrowing rates.”In 2002 Tyco lost a reported $400 millionafter losing the confidence ofinstitutional investors in itscommercial paper programme.Amid investor concerns aboutaccounting at the firm, the conglomeratehad to draw on a backup line ofcredit from its banks to come up withthe cash it needed. The move to replacecheap commercial paper with the moreexpensive bank line cost Tyco about$400 million in additional after-taxannual borrowing expenses, slicingabout five cents per share from firstquarterearnings, which were expectedto come in at 80 cents per share. Accordingto Withers, the ratings slide beganlong before Tyco’s accounting troubles.In January 2001. “There were a few surprisesfrom Californian utilitiesfollowed by downgrades in the telecomsand automotive sectors.”Prominent US issuers ofcommercial paper programmes downgradedin 2003 would be too numerousto mention, but they include Cargill,Eastman Chemical, Carnival andSchering-Plough.“In the corporate bond market if youlose one notch rating you will still haveaccess to the investors, but in the commercialpaper market you could end upRank Programme Dealers USD Eqv (at issue) m Trade %Share1 Deutsche Bank 10,153.29 1,507 13.412 Citigroup 9,192.56 1,330 12.153 Barclays Capital 7,583.72 1,274 10.024 UBS 7,262.38 1,141 9.605 JP Morgan 5,188.88 918 6.866 Goldman Sachs & Co 5,185.36 820 6.857 Royal Bank of Scotland 5,020.43 759 6.638 ING 3,410.30 800 4.519 Credit Suisse First Boston 2,381.00 516 3.1510 Lehman Brothers 2,343.23 465 3.10Total 75,686.62 2,102 100.00Source: DealogicTHE CF GUIDE TOSHORT-TERM DEBT»Operating term loans: used forworking capital management to coverinventories, monthly expenses, interest onoutstanding loans, rent, utilities, leases.»Revolving lines of credit: a creditfacility which allows the borrower, withina credit limit and for a set period, toborrow or repay debt as required.»Revolving loan: a loan where theborrower decides the number and timingof withdrawals against the bank loan; anymoney repaid may be re-used at a futuredate. (A line of credit where the customerpays a commitment fee and is then allowedto take and repay funds at will. It is usuallyused for operating purposes, fluctuatingeach month depending on revenues andexpenditures.)»Commercial paper: used bycorporates to issue short-term IOUs forshort-term financing – lasting up to 270days or just one day only. Commercialpaper invariably doesn’t require anyguarantees and is the cheapest source ofdebt financing. Rates are typically belowlonger-term bonds and loans from banks,largely because it is less risky to lendmoney for such a (relatively) short timeperiod in which it is so much easier topredict the fortunes of the company.being completely cut off, especially onnon-domestic programmes,” saysAchour.“The majority of short-durations arepooled vehicles, generally rated AAA,and we have to invest a largepercentage of our cash in higher ratednot lower rated vehicles,” says WayneBowers, the director of global fixedincome at Northern Trust GlobalInvestors (NTGI). “If you look at the costclientmandate we manage, one of therequirements is the ‘preservation ofprinciple’. If you have money held inthe short-term the last thing you wantis to suffer a fall in your investment. Thelevel of risk on duration and the riskperspective is very limited.”Not all domestic markets are as strictas the US market. “TheEuropean market is more forgiving,”says JC Perrig, Bank of America’s headcorporatefinancemag.com March 2004 cf 35
MANAGING CASHSHORT-TERM DEBTof international debt capital markets,“especially in Germany and France.Name recognition still stands for a lotmore in Europe where as in the US themarket is driven by hard ratings.“The credit markets in Europe havematured a lot and can make the distinctionbetween an isolated event andthe broader environment. A one-offcredit incident doesn’t fundamentallychange the picture.”Securitization: the alternativeoptionThe increasing number of downgradesover the last two years, combined witha global slowdown and falling interestrates, may have been bad news forstraight commercial paper butalternative methods of short-termfinancing, such as securitization, havebenefited. By borrowing money againstdefined revenue streams, issuers canaccess funding at costs which wouldotherwise be unavailable to them.In December 2003, the US securitizationmarket was worth €625 billion,in Europe €98 billion. In Europe, theasset-backed commercial paper sectoris about 25% of the total commercialpaper market and in the US itrepresents over $700 billion or 55% ofthe total commercial paper market.“The good thing about securitizationRick Pelini, Lexmark: “Lexmarkdoesn’t have a traditionalcommercial paper programme. Wechoose to fund our short-term needsthrough a securitized receivablesprogramme.”is that for corporates rated BBB orbelow it’s cheap money for them,” saysAchour. “Using securitization isn’t toocost effective for A-rated corporates,but it’s a good complementary shortterm funding [strategy].”Huntley agrees. “Corporates withlower ratings will use asset-backedsecuritization as a source of off-sheetbalance sheet funding that is attractivelypriced.”One corporate treasurer to takeadvantage of securitizaton is US oilcompany Weatherford. The companydoes not run a commercial paper programmebecause, “the company wouldprobably be an A2-P2 issuer, meaningless access to investor cash,” saystreasurer Joe Gocke.Instead it has an asset-backedaccounts receivable programme. “Webegan the programme in 2001,primarily as a less expensive source offunding,” says Gocke. The programmeoperates in the US, a source of a third ofWeatherford’s revenues. “Weatherforddoes business in 100 countries aroundthe world so the administrational costsof an asset-backed programme in all ofthese countries would be prohibitive,”he explains.Rick Pelini controls treasury operationsat Lexmark, the US printingsolution provider. He tells a similarstory. “Lexmark doesn’t have a traditionalcommercial paper programme.Instead, we choose to fund our shorttermworking capital needs through asecuritized receivables programme.This provides access to the stable A1/P1commercial paper market at pricesonly slightly higher than actuallyhaving an A1/P1 programme.“Because of our excess cash position,Lexmark doesn’t actively manage ashort-term versus long-term debt portfolio.Our overall philosophy is toensure adequate lines of credit throughbank revolvers (we currently have $500Janet Hargreaves,treasurer at BalfourBeatty and MMFBalfour Beatty providescivil engineering anddesign services to rail, roadand utility systems. It’sshort-term needs are great.“Our short-termborrowings are all on themoney markets or on anoverdraft – we don’t usecommercial paper as wedon’t have a public ratingand don’t really think it’sworthwhile to do so,” saysJanet Hargreaves who headsup the treasury team.“We monitor cash on adaily basis and know withina month when we’re goingto be short of cash,” shesays. “The flexibility of themoney markets is the mainadvantage – I can raisemoney for any period fromovernight to one week to sixmonths.”According to SanderBoelen, global head ofliquidity management atABN AMRO, the moneymarkets are maturing fastand there is a growingappetite for the funds.“There has been a shiftfrom corporates tocorporates to corporates tomoney market funds.Falling interest rates havehelped encourage this, ashave recent high profilecorporate fraud cases.”More and more corporatetreasurers are askingthemselves: “Do I want toinvest this money myself oroutsource the capital todiversify. The first concernfor the treasurer is capitalpreservation. Personally, Idon’t believe that atreasurer should be goingafter every last basis point.”“His [the treasurer’s]second concern is liquidity.“Can I get my capital backwhen I need it? Return oncapital is not the maindriver in most cases. It isliquidity and thestreamlining of thetreasury. The funds allowyou to be part of a largergroup of investors whichgives economies of scale.The other thing you buy isthe whole riskmanagement systembehind it. When there istwo per cent interest for apiece of paper there is notmuch room to play with ifthings go wrong.”36 cf March 2004 corporatefinancemag.com
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Page 3 and 4: CONTENTSMARCH 200422 Lead storyThe
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