Eurocommercial Paper (ECP) is short-term unsecured notes issued by firms in markets outside their domestic markets. This instrument is one of the more recent to develop in Euromarkets. Throughout the 1970s and early 1980s, both US and foreign borrowers relied heavily on the US commercial paper market. Even though the first issue of Eurocommercial paper was in 1970 by an American firm, this form of financing did not gain widespread acceptance until 1985.
Arrangements that permit an issuer to request immediate sale of the paper or that allow a securities dealer to solicit an issue when the timing is most advantageous have made the market more appealing as an alternative to short-term bank loans. Advances in communications technology have made precise timing of the issues possible. In addition, commercial paper interest rates compare favourably with other sources of financing.
Technical features of ECP
Eurocommercial paper is at present denominated only in United States dollars. It is issued in multiples of $10 000 with a minimum of $50 000. Maturity is three or six months. Notes are issued directly by the company requiring funds or by a finance subsidiary. If the latter they are unconditionally guaranteed. They are made out to the order of the sponsoring bank, which endorses them without recourse. They then become negotiable. To date almost all the issue have been for United States corporations. In terms of OFDI regulations such borrowing qualifies as long-term, i.e. it can be used as an offset against foreign borrowing, provided it is not in fact repaid within twelve months of the original date of borrowing, even though it consists of a series of short-term borrowings which are continuously re-financed.
Comparison of US Commercial paper and Eurocommercial paper
There are two major markets, the US dollar market with an outstanding amount in 2005 of just under $1 trillion, and the eurocommercial paper market with an outstanding value of $490 billion at the end of 2005. Commercial paper markets are wholesale markets, and transactions are typically very large. In the US, over a third of all CP is purchased by money market unit trusts, know as mutual funds; other investors include pension fund managers, retail or commercial banks, local authorities, and corporate treasurers.
|US Commercial paper||Eurocommercial paper|
|Currency||US dollar||Any euro currency|
|Maturity||1-270 days||2-365 days|
|Common maturity||30-180 days||30-90 days|
|Quotation||on a discount rate basis||on a yield basis|
|Interest||zero coupon, issued at discount||fixed coupon|
Advantages of ECP
There are several advantages of Eurocommercial paper:
ECP is often cheaper than bank financing. ECP is a very flexible and simple instrument, and can be rapidly structured to satisfy both issuer's and investors' needs. ECP is usually issued outside the influence of any regulatory jurisdiction of national governments and therefore can be structured in almost any way to satisfy requirements of investors and issuers.
- H.J. Johnson 2000, p.56-57
- B. Scott-Quinn 2014, p.96
- M. Choudhry 2018, p.223-224
- E.C. Buljevich, Y.S. Park 2007, p.35-36
- Buljevich E.C., Park Y.S., (2007). Project Financing and the International Financial Markets, Springer Science & Business Media, Boston.
- Choudhry M., (2018). An Introduction to Banking,John Wiley & Sons, Copenhagen.
- Johnson H.J., (2000). Global Positioning for Financial Services, World Scientific, Singapore.
- Scott-Quinn B., (2014). The New Euromarkets, Springer, London.
Author: Emilia Trzeciecka