Treasury Today Country Profiles in association with Citi

The cheapest money you’ll ever raise

In the current environment, commercial paper (CP) issued by corporates really hits the sweet spot as far as asset managers are concerned. The debt instrument allows them to tailor their maturity profiles and protect their capital at the same time. “CP stands pari passu with senior bonds in terms of seniority in the capital structure. We would love to buy more corporate CP, but the current market is dominated by the financials,” explains an analyst from a leading asset management company.

“We have to look at where we think we can get the best yield. CP and certificates of deposit (CD) make up the bulk of our funds because they fit our maturity criteria. We are buying three and six month paper because rates aren’t going anywhere and the end of the CP curve is pretty steep. CDs are slightly more expensive because they are a little more liquid.”

All fund managers want to diversify their portfolios. Sadly, few corporates maintain commercial paper programmes, which means that when highly-rated short-term paper sees the light of day it is snapped up like hot cakes. In fact, there is such a dearth of corporate CP that many of the most highly-rated corporates are able to tap the market at extraordinarily low interest rates at the moment. Take Nestlé, for example, which recently issued three month, euro-denominated CP at an astonishing two basis points.

“We would like to buy more corporate CP paper to diversify, but the yield is extremely low. If you need short-term funding of less than one year now is a great time to issue CP if you are a corporate,” he says. In fact, the paucity of high quality CP with yielding decent interest rates has caused fund managers to turn to some of the more risky continental banks to eke out extra yield and diversify its portfolio of investments. Indeed, many asset managers have started to adopt a more maverick approach to some of the so-called ‘cuspy’ banks – particularly those in France and on the periphery of the Eurozone.

“All we are interested in is do the banks have enough money to repay the principal and fund themselves in the market. With the banks in Italy and Greece, Portugal, Ireland, the answer clearly is no. We bought Irish and Portuguese banks 12-18 months ago, but we wouldn’t touch them now. We still feel Santander in Spain is robust enough given the diversity of its revenues streams. On saying that, it represents about five per cent of our total exposure and it is all over night exposure so we can pull back quickly if need be.”