Florence Saliba, chairwoman of the French Treasurer Association (AFTE) and François Gouesnard, vice-chairman of the funding commission, provide a positive assessment on the Banque de France’s action aimed at restoring confidence in the NEU CP market – Interview

– What is your perception of the current functioning of the NEU CP market?

– Our perception changes from one week to the next, fortunately in a positive way! The freeze in the NEU CP market has generated a lot of stress within treasury teams. The announcement of the European Central Bank’s (ECB) intervention to unblock the situation on March 18th raised hopes for a rapid resolution of the crisis, but the implementation of a programme of repurchase of Commercial Papers (CPs) by the Eurosystem is not trivial.

The question of eligibility was clarified within a week. Primary market buybacks apply to investment grade issuers that are 100% privately owned. Agencies such as Acoss do not have access to the scheme and companies with government participation are only eligible for buybacks in the secondary market. These rules are virtually identical to those of the 2016 corporate bond buyback programme.

Banque de France’s initial actions to support the NEU CP market were initiated on 27th March. These operations rapidly brought the outstanding NEU CP amounts issued by non-financial corporations back to pre-crisis levels and beyond. In the first few weeks, the buybacks involved huge tickets with maturities ranging from six to twelve months.

After the initial ramp-up phase, the French central bank adapted to the way treasurers prefer to issue negotiable debt securities. From the treasurers’ point of view, it is less risky to regularly renew small tickets rather than concentrating on a single large issue. The central banker still intervenes on large tickets (mostly over EUR 100 million) but we have seen some issuances that are more in line with the practices of this market i.e. worth EUR 50-60 million. The smallest repurchase observed to date was for EUR 30 million.

Finally, with regards to prices, the interventions concentrated on long maturities and have restored a certain degree of confidence in the market. Investors seem to be coming back. While they still favour short maturities, from a few weeks to a month, they are now more open to longer dated issuances.

As a result, we have now covered most spectrums of the yield curve. Prices have slightly shifted upwards, reflecting the pressure on crisis-related liquidity, but the market is still there.

– What is the situation for non-rated issuers?

– The situation is very different from one issuer to another. Higher quality issuers do not have issues in finding investors although for them, the market has not yet completely normalised. They still have to roll over every two to three weeks, which means extra work and stress for the treasury teams. However, the situation is clearing up. The current momentum looks promising in returning to favour lower credit quality issuers, whose outstanding NEU CP balances have declined significantly in last few weeks.

We also need to take into account the fact that the few financial investors who used to buy NEU CPs for their own account are no longer active in this market. Money market funds managers, for their part, will come back when they have cash to invest. However, their inflows depend on the overall cash position of companies, which has been undermined by the crisis…

– How would you compare the effectiveness of the actions of the Eurosystem compared to those of the Bank of England and the Federal Reserve?

– In April, the market for NEU CP stabilised and now outstanding issuances are rebounding. The Banque de France’s intervention methods do not yet seem to be very effective in the secondary market, but we note that efforts are made to find a solution. In this crisis, the French central bank is demonstrating its commitment to the market participants by trying to make the best possible progress in compliance with the European treaties and the rules of the wider Eurosystem.

The Bank of England and the Federal Reserve publish the prices they offer to buy back each type of paper. This is a pragmatic approach which, in the light of the prices charged – higher than the market rates – seems, above all, suitable for issuers facing an urgent need for liquidity. The objective pursued by the Eurosystem seems to stem from a different philosophy, which consists in ensuring that the market holds and resumes.

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