Text 8 Eurocommercial paper

Eurocommercial paper, like euronotes, consists of short-term negotiable debt instruments.

A company which wants to raise money by issuing eurocommercial paper will negotiate a programme with a dealer or several dealers. For a large programme, a company might find three dealers:

(a) a bank in the UK;

(b) a US bank, acting as a dealer for most of Western Europe (eg Germany);

(c) one of the leading Swiss banks, which will have contacts with many large investors.

There will be a borrowing limit under the ECP programme, but the corporate borrower has much more flexibility than with euronotes, and interest rates are 'market-driven' (ie much more subject to market influences, compared with the interest rate on euronotes, which is decided by the tender panel of banks).

The flexibility of eurocommercial paper arises because the borrower is able to choose the period to maturity (whereas euronotes are issued for a standard three-month or six-month period). For example, a company might decide that it wants to issue some new paper at the end of November, with maturity in the middle of March. However, if the interest rates that would be payable are not attractive enough at the time for this term of borrowing, the borrower can re-think and alter the term of the issue, and, say, decide instead to issue paper with a maturity in mid-February. Corporate borrowers are therefore able to 'play the market' and try to schedule borrowing for when they expect interest rates to be most favourable to themselves.

The advantages of eurocommercial paper are that:

(a) there is greater flexibility;

(b) interest rates are determined more by market conditions;

(c) a company that issues ECP does not have to be formally 'rated'. However, companies that are rated will be able to issue paper at finer rates;

(d) the costs of ECP programmes are less than underwritten euronote facilities.

Conclusion

Eurobonds, euronotes and ECP are examples of the development in recent years, from 'old fashioned' bank credit to pure commercial paper.

(a) Bank credit is finance provided by a bank, with the debt repayable to the bank. Given the large size of euronote or ECP issues, the equivalent form of bank lending to commercial paper has been the syndicate bank loan, ie a loan made by several banks in collaboration, to a single borrower.

(b) Commercial paper is finance obtained by an organisation issuing a debt instrument of its own, which is sold through banks to investors.

Part III documents

A mock-specimen example of an irrevocable credit

This letter of credit provides for the negotiation of a draft drawn by the exporter on the buyer. In this case, the UK customer is importing from abroad, and the UK bank has been asked to issue the credit.

North bank plc

International Division

Address

Date ..................

Confirmation of cable

To: (Name and address of the beneficiary)

Dear Sirs,

We hereby establish in your favour an IRREVOCABLE Letter of Credit number ___ for (amount) ________(In words)__________available by your drafts in duplicate, at ________ days' sight on (name and address of the applicant for thecredit and drawee for the drafts)___ for 100% of the invoice value, accompanied by the following documents.

Documents to be presented

Shipment to be made by (shipping company/carrier) evidencing the taking in charge from (place of shipment) for transport to (place) not later than (date) of the goods specified below

At a price of _______ FOB/CFR/CIF (_______(place)

Part shipments prohibited/not prohibited

Transshipment prohibited/not prohibited

Drafts are to be drawn and negotiated in (place, eg. country or city) not later than (date). Each draft must state that it is drawn under North Bank pic, London, letter of credit number____

Dated:_____________

Engagement clause. We hereby issue this documentary credit in your favour. It is subject to the Uniform Customs and Practice for Documentary Credits, 1983 revision, ICC publication number 400. We hereby agree with the Drawers, Endorsers, and bona fide holders of Drafts drawn under and in compliance with the terms and conditions of this Credit that such Drafts will be duly honoured on due presentation to the Drawee, if drawn and negotiated as stipulated above.

1st Signature (Bank representative)

2nd Signature (Bank representative)

(1) This credit is advised to you through (advising bank, name and address)

(2) The Advising Bank will please transmit this Credit to the Beneficiary with/without adding its confirmation.

Instructions to the negotiating bank are indicated on the reverse side of this letter of credit. To: (Name and address of the beneficiary)