If you use the NEU CP market, you can stop drawing on your bank lines, keep them as backstop lines, and issue commercial paper at a zero or even a negative rate and at very low cost in terms of legal documentation, writes Muriel Nahmias, senior director at Redbridge.
Let me ask you a question: what is the best short-term financing market in Europe for a European non-financial corporate? If you say the Euro commercial paper market (EuroCP), it’s not the right answer. In fact, the best place for European corporates to be for issuing short-term debt securities is the NEU CP (Negotiable European Commercial Paper) market for maturities of up to one year. The NEU CP market is supervised by the French central bank.
Several CP markets across Europe, but only one standing out…
In Europe, there’s a commercial paper market in almost all countries, but they are small and domestic in nature. The French NEU CP market has some benefits that you won’t find in the domestic markets – most notably considerable market depth and competitive pricing – or in the Euro CP market, which is largely for highest-rated issuers. Investors in the NEU CP market have plenty of appetite for corporate credit, even if it is unrated. The market is also receiving large support from the ECB asset purchase program, putting downwards pressure on pricing and improving its liquidity.
It’s also possible for corporates to obtain funding in the NEU MTN (Negotiable European Medium Term Note) segment for maturities above one year. It isn’t so deep compared to the NEU CP, but it’s promising as a complement or alternative to the Eurobond market, which is mainly used by rated issuers for benchmark-size issues, or even as an alternative to Schuldscheine, which contains financial covenants.
If you use the NEU CP market, you can stop drawing on your bank lines, keep them as backstops, and issue commercial paper at a zero or even a negative rate, and at very low cost in terms of legal documentation.
The NEU CP / NEU MTN market, which was reformed in May 2016, is in line with European regulations and international standards. It is by far the biggest and deepest corporate CP market in continental Europe. According to the ECB estimates, “the market for corporate commercial paper denominated in euros currently amounts to approximately EUR 75 bn. However, the depth of the commercial paper market differs widely across jurisdictions, with France accounting for the largest issuance volume in the euro area”[1].
The NEU CP market has all the advantages it needs to become the pan-European CP market, in which all European blue-chip companies should print short-term debt. This idea is even supported in the framework of the EU’s Capital Markets Union.
What are the criteria to have access to it?
So how can you access this excellent source of funding? The French central bank needs to approve the registration of your NEU CP and / or NEU MTN program if you are to issue these short-term debt securities. So it’s vital that you are aware of a few subtle nuances concerning the eligibility criteria.
First, the NEU CP or NEU MTN program must be rated by one of the five rating agencies that have been approved so far by the Bank of France (S&P, Moody’s, Fitch, Scope Ratings and Spread Ratings / Quivalio) or be guaranteed by a rated entity.
There is a major exception to this rule: the issuer or the guarantor does not need a rating if it has issued bonds or stocks that are listed on a “Regulated Market” (as opposed to a multilateral trading facility – MTF – or organized trading facility – OTF) in one or more countries of the European Economic Area[2] as defined by the European MiFID regulation, or a market outside the EEA that has been granted “equivalence” status by the European Commission. In practice, not all markets in continental Europe are recognized as regulated markets according to the MiFID definition. Only regulated markets or those approved as equivalent can provide access to the CP market for companies without a rating.
As it stands, neither the UK nor the Swiss exchanges have this status. This means companies from the UK or Switzerland wishing to access the NEU CP or NEU MTN market would need a short-term rating or a guarantor that is rated or listed on a regulated market. The same applies if a firm has a bond listed on the Euronext Growth or Luxembourg EuroMTF, which are not regulated markets.
Thus, if your company’s stocks and / or bonds are listed on a “Regulated Market” or if you already have a rating, it will be very easy to access one of the most competitive and flexible sources of funding of the world. If this is not the case, you could consider either obtaining a rating, possibly at a modest cost, or approaching your banks for a guarantee.
[1] https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200403~54ecc5988b.en.html
[2] The 27 EU member states + Iceland + Norway + Liechtenstein