Euro Notes and Euro Commercial Paper

Euro Notes

Euro Notes are like promissory notes issued by companies for obtaining short term  funds. They emerged in early 1980s with growing securitization in the international financial  market. They are denominated in any currency other than the currency of the country where  they are issued. They represent low cost funding route. Documentation facilities are the  minimum. They can be easily tailored to suit the requirements of different kinds of  borrowers. Investors too prefer them in view of short maturity.

When the issuer plans to issue Euro notes, it hires the services of facility agents or the  lead arranger. On the advice of the lead arranger, it issues the notes, gets them underwritten  and sells them through the placement agents. After the selling period is over the underwriter  buys the unsold issues.

The Euro notes carry three main cost components: Underwriting fee; One time  management fee for structuring, pricing and documentation; and Margin on the notes  themselves. The margin is either in the form of spread above/below LIBOR or built into the  note price itself.

The documentation is standardized. The documents accompanying notes are usually  underwriting agreement, paying agency agreement, and information memorandum showing,  among other things, the financial position of the issuer. The notes are settled either through  physical delivery or through clearing.

In course of time, a few variants of Euro notes issue system have evolved. The first is  the revolving underwriting facility in which there is a sole placement agent who allocates the  notes among investors at a uniform preset yield. The second is the tender panel system in  which the placement agent forms a panel of banks for placing Euro notes on behalf of the  issuer. The tender panel members submit tenders to the placement agent indicating the  amount and price of notes they would like to acquire. In this case, price is set by open  competition and so it goes in  favor  of the issuer. But the placement agent may not have the  same level of commitment as it is found in the case of the sole placement agent. The third  variant is continuous tender panel in which the underwriters constitute a tender panel for each  draw down of notes. They buy them, if left unsold, during the offer period. This system  brings in competition among the underwriters.

Medium-term Euro Notes

Medium term Euro notes are just an extension of short term Euro notes as they fill the  gap existing in the maturity structure of international financial market instruments. They are a  compromise between short term Euro notes and long term Euro bonds as their maturity  ranges between one year and five to seven years.

The short term Euro notes are allowed to roll over repeatedly over five to seven years.  Every three or six months, the short term Euro notes are redeemed and a fresh issue is made.  Alternatively, a medium term Euro note is issued to get medium term Euro note is issued to  get medium term funds in foreign currency without any need for redemption and fresh issue.

Medium term Euro notes are not underwritten, yet there is provision for underwriting.  This is for ensuring the borrowers that they get the funds even if they lack sufficient  creditworthiness. They are issued broadly on the pattern of US medium term notes that are  found there since early 1970s. Medium term Euro notes carry fixed rate of interest, although  floating rates are also there. In recent years, multi currency structure has come up. The issuers  are mainly banks, sovereigns and international agencies.

Euro Commercial Papers

Another attractive form of short term debt instrument that emerged during mid –  1980s came to be known as Euro commercial paper (ECP). It is a promissory note like the  short term Euro notes although it is different from Euro notes in some ways. It is not  underwritten, while the Euro notes are underwritten. The reason is that ECP is issued only by  those companies that possess a high degree of rating. Again, the ECP route for raising funds  is normally investor driven, while the  Euro notes is said to be borrower driven.

ECP came up on the pattern of domestic market commercial papers that had a  beginning in the USA and then in Canada as back as in 1950s. The prefix “Euro” means that  the ECP is issued outside the country in the currency in which it is denominated. Most of the  ECPs are denominated in US dollars, but they are different from the US commercial papers  on the sense that the ECPs have longer maturity going up to one year. Moreover, ECPs are  structured on the basis of all in costs, whereas in US commercial papers, various charges,  such as front end fee and commission are collected separately.

The detailed features of ECPs vary from one country to another. They involve market  based interest rate, LIBOR. The issue is normally arranged through placement agents as in  the case of Euro notes. The amount varies from US $ 10 million to US $ 1 billion or above.  The ECPs are issued either in interest bearing form or in a discounted form with interest built  in the issue price itself. On completion of the maturity, they are settled generally at the  clearing houses, such as Cedel (Luxembourg), Euroclear (Brussels), First Chicago (London)  or Chases Manhattan (London) so that the physical delivery is avoided. The settlement is  complete normally within two days.

ECPs face minimal documentation. Over and above, they are not underwritten. This is  why their use has been large since their very inception.

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