The French conduit market is slowly inching its way to incorporating a proposed overhaul of the 10% holding limit imposed on French institutional investor holdings of short-term instruments issued outside of France.
This is well within the time limit initially set by the French Regulation for Undertakings for Collective Investments In Transferable Securities (UCITS), which this time last year began talks and initially set out a two year time frame.
French conduits until now concentrated on the billet de tresorie (BT) paper, catering to a predominately domestic investor base. BT paper is regulated under the law governing negotiable securities and is under the control of the Banque de France and the Commision des Operations de Bourse, the French version of the Securities & Exchange Commission. So under current legislation, European Commercial Paper (ECP) is not considered a regulated instrument and, in order to protect the short-term investors, a maximum was imposed on holdings in financial instruments not traded on the regulated market.
The new UCITS regulations must also come in line with the European Union directive that treats ECP as a regulated instrument. The proposed changes would allow French investors to remove the 10% cap on investments made outside of France and open up buying opportunities for ECP.
"Up to now there used to be more A1+/P-1 conduits on the ECP market than the BT's and overall, the conduits are fewer on the French market [with limited growth opportunities]," said Thomas Leorat at Credit Lyonnais. "Nowadays prices tends to be reaching ECP levels. The net price tends to be on the same level but we anticipate that once the French regulators lift the limits the market will merge or move towards a more open market where we can enhance investors opportunities by taking more ECP."
It also paves the way for greater selling abroad, he said. Efforts to sell BT abroad can be quite tricky, said Leorat, because of settlement variations and, because there is really no well-known BT issuer, it's harder to get investors comfortable. But he said this opportunity to include ECP in the mix should be approached with caution. "ECP would open up the investor base, which means we could grow the conduit size," he said. "What we have to be careful of is not to cannibalize the note: we want to keep our current investors satisfied with our price on the BT market, so any ECP market issue should come gradually and regularly without leading to too much mismatch on the yield of the BT versus the ECP."
The Credit Lyonnais conduits, like most French conduits, fund themselves under French BT. Its latest conduit, LMA, has to date issued E3.4 billion ($4 billion) outstanding. Among the French market competitors, only Societe Generale incorporates ECP in its French conduits, said Leorat. However Credit Lyonnais is currently working on a new program that would incorporate ECP as well.
Because the market is more
regulated in France, Leorat said that French investors will, as a result, remain more comfortable with
BT notes.
Going forward, growth in the French conduit market will likely be fueled by increasing conduit size. Leorat expected limited new entrants to the market. "For us, the volume of conduits continues to be small and the limited access to investors means we cannot come at anytime," he said. "We are hopeful that the market will see new entrants but first we need more investors and opening up to ECP might be the link needed."
He noted that this move to create a more homogenous market might mean the regulators would also address the way the instrument is listed. ECP regulations do not allow for electronic filings and requires physical depository, which makes the process more difficult. In addition, the BT is eligible for the European Central Bank financing, which means that it can be less costly for banks to hold the paper and it can be used as collateral.
Not the only changes...
Change is also expected in other parts of the French securitization market. According to market sources, the French Parliament has recently approved a number of legal changes to the securitization law. The new law would permit the fonds commun de creance (FCC) to issue debt or negotiable financial instruments, and also allows the FCC to enter into credit default swaps. It would also be able to sell as well as buy protection. But more importantly, the new law would make the transfer of future receivables enforceable in the event of a seller's bankruptcyc and it also calls for the creation of a lock-box account that would eliminate commingling risks.
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