Structured Euro-CP is one of the most exciting growth areas of the market. Issuance is expanding and 14 borrowers of this type have joined the market since January, last year. The sector has burgeoned in the US market - 40% of total CP issuance comes off such programmes. And dealers say this growth could be mirrored in the Euromarket. But the lack of resources and credit research by European investors is slowing progress. Sigma Finance (Sigma), signed in 1995 and is optimistic about growth in the sector, which currently represents 10% of the market. Phillippa Sharpe, treasury dealer at Sigma, says: "The capacity of the structured market is still very limited. Liquidity is low and dealer bids on the paper are not always attractive which can discourage investors. Yet, as the market becomes more sophisticated and investors are better able to carry out the necessary credit analysis, Sigma expects increased demand." Many investors classify all structured programmes as asset-backed, but there are two distinct types. Special purpose investment vehicles or structured investment companies, such as Sigma and K2 Corporation (K2), use leveraged capital to purchase financial assets which can come from any source. Conduit vehicles, such as Silver Tower and Viking, which are springing up more frequently, usually only buy assets from their parent bank. But the problem in the Euromarket is that with different issuers describing their programmes in different ways, such as asset-backed and structured investment vehicles, it can be confusing and difficult to categorize the group. John Ford, head of Euro-CP at Deutsche Bank believes investors need more information and the sector needs to be more clearly standardized. He says: "As more asset-backed and credit arbitrage vehicles come to the market there will be more scope for investors. But investors need to be able to recognize the key features of these programmes so that they have confidence in what it is they're buying. There is a relative amount of confusion about the workings and the purpose of these companies." Giles Chapman, head of Euro-CP, at Citibank, agrees that educating investors helps. He says: "Many investors understand the way such vehicles work, but there are still some who don't and who have not had the time or resources to look at them. That's something we'd like to change. There are a small minority of investors who buy the paper on the strength of its good ratings and high yields, without necessarily fully understanding the structure of the issuer." The benefits of structured CP for investors are clear. Out of the 38 structured programmes in the market, 24 have top ratings of A1+/P1, according to CPWare. Yet many offer rates as attractive as Euribor flat. Structured investment companies maintain their ratings by marking-to-market and following the rules of the rating agencies on buying and holding assets. Peter Eisenhardt, Euro-CP origination, at JP Morgan, explains: "Investors have to feel comfortable with entire structures: that they have adequate protection through strict guidelines on diversification, credit enhancement, market risk/hedging, and asset quality. Assets falling below a certain value must be sold by the issuer and replaced with higher quality assets. This is reassuring for investors." Sigma has dedicated much time and effort into telling investors about its legal and credit structure. It is keen to make as much information as possible available to the market. Sharpe, at Sigma, says: "Sigma believes in transparency and reports weekly to the ratings agencies in order to fulfil their requirements. Weekly and monthly reports are available on our website for investors." Growth and change lie ahead for the sector as dealers predict an influx of US issuers in the next few years. Eisenhardt, at JP Morgan, says: "There are a lot of US asset-backed issuers which have been impressed by the growth of the Euromarket and are ready to dive in. Although Euro-CP can be slightly more expensive, commissions are generally less so that can be attractive. The Euro-CP market is smaller, but more geared to term funding." But as more structured programmes enter the market competition will hot up and prices could be forced down. This could shake the market up for Euromarket borrowers. Yet Paul Clarke, manager of K2, does not consider this will be a problem and says more issuers is good news. He says: "I have not seen evidence that US borrowers will come to the market at a faster rate than the Euromarket itself is forecast to grow. So on that basis their arrival is not of great concern to us. It also has to be a good idea for large, US issuers of structured CP to issue in the Euro-CP market because it improves the quality of their liquidity by reducing their reliance on any one market." Dealers are confident of seeing growth in the sector once the hurdles of investor education, same day settlement and regulatory restrictions are tackled. Ford, at Deutsche Bank, sees two main catalysts to this. He says: "The motors for growth are the availability of assets to buy - so far these programmes have focused on US dollars but as the Euro corporate bond market develops this will encourage opportunities for investment. And, as the Euro-CP market grows there will be increased opportunities for cheaper funding."
August 11, 2000
