The U.S. commercial paper market may still be four times larger than its European counterpart, but with market volumes in the U.S. on the downtrend and a growing appetite for European commercial paper, the ECP market is starting to close the gap.
According to figures reported last week at the Credit Suisse First Boston ABCP teleconference, ECP growth has doubled since 1998 and increased by 12% over the last 12 months. Euro-denominated outstandings have increased tenfold since 1998, and the euro is now the ECP market's largest currency by volume - accounting for 41.6% in the first seven months of this year and 38.8% by outstanding.
Banks still largely dominate the ECP market, but ABCP is the fastest-growing portion, accounting for 14% to 15% of market activity. ABCP volumes are up to $36.1 billion equivalent, and SIVs add an additional $11.4 billion equivalent from the $27 billion recorded in 2001. "Growth has primarily come from European bank conduits, both from new programs and from the expansion of existing conduits," said conference moderator Louise Mason, vice president of ECP origination at CSFB.
Sterling issuance is also experiencing rapid growth and now accounts for 13% of conduit outstandings. "It used to be regulatory impossible to issue sterling-based paper, but since November 2001 the law has been dropped and there has been an increasing interest in sterling denominated conduits," said conference speaker Diana Turner, senior director at Fitch Ratings.
The migration to lower-tiered conduits was noted as one of the more interesting developments in 2002. Although most of the European conduits are rated A1+'/P1'/F1+', the growth in A1'/P1'/F1' rated conduits now accounts for 32% of conduits outstandings. Arabella is the largest one in the market currently, said the speakers.
"This move to F1' rather than F1+' has been driven by the need for liquidity, and the price differential is not enough to deter sponsors from issuing at this rating," said Turner. In fact, figures reported at the conference show that the price differential between established conduits rated A1'/P1'/F1' versus those rated in the top tier are as small as one or two basis points. Most asset-backed ECP issued by conduits is euro-denominated and trades within the range of one basis point under to four over Euribor.
European conduits are funding themselves 67% U.S. CP, 24% ECP and 9% Billets de Tresorie, and the majority of the assets being funded via the Euro market are asset-backed securities, accounting for 41%. Trade receivables accounted for 24%. Many of the new programs this year have been hybrid or securities arbitrage programs, and there have not been any purely multi-seller conduits. Assets come from the U.S. (23%), EMU Europe (50%) and the UK (8%). Within Europe, the Netherlands is the largest single area.
Conduit outstandings is dominated by one-month and three-month issuance. There is a lack of issuance in anything under one month, but developments in the settlement process are allowing for shorter opportunities and may open up the possibility of same-day paper. "They can get longer tenors in Europe than they are able to get in the U.S. market, and we find that they issue based not only on pricing or assets, but on the tenor they can get on any given day," said one speaker.
Spreads have weakened in the U.S. CP market for all asset classes, and when compared to spreads of Libor/Euribor - which include dealing commissions on A1'/P1'/F1' ABCP - they are currently similar. "It's difficult to give an idea of pricing because we do suffer from a lack of pricing industry, but Euroclear is in the process of developing one that should be ready by first quarter 2003," said one speaker.
As the market matures, conduit programs are able to establish themselves more quickly. "Rhineland was the latest rated by Fitch. We saw good marketing by the sponsor, supported by a road show, and it managed to attract a good investor base," said Turner.
The moderators also highlighted that the ECP market growth has been fueled by very strong growth in the mutual fund sector. The money-market-fund investor base accounts for the largest individual investor base for ECP. A feebly performing equity market has propelled the growth.