With rates falling, commercial paper finds more favor
The short-term debt tool has only been around on the Polish market for about two years. But this year alone, global financial turmoil aside, the value of outstanding commercial paper had risen to zl. 5.1 billion ($1.5 billion) by the middle of October, compared to zl. 2.5 billion ($715 million) at the end of 1997, according to the Central European Rating Agency (CERA). It added that outstanding commercial paper grew month to month on average by 7% since the end of last year.
And this growth is expected to continue and even pick up slightly in 1999.
"Over the last two years companies were financing their growth with equity," said Albert May, corporate finance & capital market head at Citibank (Poland). "But the boom of the last two years is not going to come back for another three years, so companies will have to find other ways of financing."
He added that the value of outstanding commercial paper will steadily increase, with the market for this tool expected to grow by 10% in 1999. "My estimates are that next year it will increase to more than $2 billion," May said.
The popularity of commercial paper was evidenced two weeks ago by Telekomunikacja Polska's (TPSA) decision to extend its program with Bank Handlowy by zl. 600 million ($171.4 million) to zl. 1.4 billion ($400 million). This makes it the largest program underway in the country. Prior to this Fiat Polska and Fiat Bank Polska had the largest program with a zl. 1 billion ($285 million) issue arranged by Citibank, ING Barings and Bank Handlowy.
Commercial paper is especially finding favor as market interest rates fall. Yields on 52-week treasury bills (T-bills) have dropped to 12.64% on Nov. 23 from 24.16% on Jan. 5.
"The price of commercial paper depends on various things, including the company's standing and ratings," May said. "But on average, it's up to 2% above the T-bill yield."
Such a cost of capital is attractive when compared to bank loans, which are typically based on the three-month Warsaw inter-bank offer rate (WIBOR). While this benchmark rate has fallen in line with T-bill declines, its fall has not been as dramatic. Three-month WIBOR was 16.26% on Nov. 26, down from 26.25% on Jan. 2.
The discrepancy between T-bill yields and WIBOR means companies borrowing through commercial paper could save up to 3-4% compared with bank loans.
That is why Swedish paper company SCA Group announced last week that it had signed a zl. 100 million ($28.6 million) commercial paper program with Citibank (Poland).
"First of all, we wanted to diversify our methods of financing," said Carl-Axel Olson, group treasurer for SCA. "But we also hope it will be less expensive than a bank credit."
In addition, by dealing with non-financial investors, who can benefit from yields above T-bill rates, companies can also avoid bank fees that can add up to 2% on a transaction, said Arkadiusz Bubak, director of the debt issues office at Bank Handlowy.
"It's alternative funding for companies," he added. "Bank loans are still quite expensive."
Falling market rates seems to have definitely spurred companies to turn to short-term, zloty denominated debt. While T-bill yields and WIBOR rates have fallen all year, there was one exception to this trend and this was the only time that the value of outstanding commercial paper declined.
On March 30 the T-bill rate went to 23.14% from 22.9% (March 23) and remained above 23% until April 20 when it decreased to 22.49%. During this period, WIBOR rose to 25.02% on March 16, up from 24.9% on March 13. It did not drop back below 25% until April 6.
March in turn saw the value of outstanding commercial paper drop by zl. 100 million to zl. 3 billion ($857 million) at the end of the month, the only time in 1998 this has occurred. In April with rates again falling outstanding commercial paper grew by 19.1%, its largest gain of the year, to finish the month at zl. 3.6 billion ($1.02 billion).
The decline in T-bill rates means that real yields have fallen as well, bringing them closer to German yields. Although Polish paper is still more expensive, currency risk is eliminated through the zloty-denominated programs.
"This is especially important after the recent financial crisis," said Dariusz Strojewski, head of capital markets at ING Barings. "
In addition, while markets are still unsteady companies can use commercial paper as bridge financing. The programs operate like lines of credit rather than traditional loans, allowing companies to only incur interest costs when capital is actually needed.
"It's a very convenient instrument," Strojewski said. "The issuer uses the money when it's necessary, the only thing he has to do is to call us."
And this growth is expected to continue and even pick up slightly in 1999.
"Over the last two years companies were financing their growth with equity," said Albert May, corporate finance & capital market head at Citibank (Poland). "But the boom of the last two years is not going to come back for another three years, so companies will have to find other ways of financing."
He added that the value of outstanding commercial paper will steadily increase, with the market for this tool expected to grow by 10% in 1999. "My estimates are that next year it will increase to more than $2 billion," May said.
The popularity of commercial paper was evidenced two weeks ago by Telekomunikacja Polska's (TPSA) decision to extend its program with Bank Handlowy by zl. 600 million ($171.4 million) to zl. 1.4 billion ($400 million). This makes it the largest program underway in the country. Prior to this Fiat Polska and Fiat Bank Polska had the largest program with a zl. 1 billion ($285 million) issue arranged by Citibank, ING Barings and Bank Handlowy.
Commercial paper is especially finding favor as market interest rates fall. Yields on 52-week treasury bills (T-bills) have dropped to 12.64% on Nov. 23 from 24.16% on Jan. 5.
"The price of commercial paper depends on various things, including the company's standing and ratings," May said. "But on average, it's up to 2% above the T-bill yield."
Such a cost of capital is attractive when compared to bank loans, which are typically based on the three-month Warsaw inter-bank offer rate (WIBOR). While this benchmark rate has fallen in line with T-bill declines, its fall has not been as dramatic. Three-month WIBOR was 16.26% on Nov. 26, down from 26.25% on Jan. 2.
The discrepancy between T-bill yields and WIBOR means companies borrowing through commercial paper could save up to 3-4% compared with bank loans.
That is why Swedish paper company SCA Group announced last week that it had signed a zl. 100 million ($28.6 million) commercial paper program with Citibank (Poland).
"First of all, we wanted to diversify our methods of financing," said Carl-Axel Olson, group treasurer for SCA. "But we also hope it will be less expensive than a bank credit."
In addition, by dealing with non-financial investors, who can benefit from yields above T-bill rates, companies can also avoid bank fees that can add up to 2% on a transaction, said Arkadiusz Bubak, director of the debt issues office at Bank Handlowy.
"It's alternative funding for companies," he added. "Bank loans are still quite expensive."
Falling market rates seems to have definitely spurred companies to turn to short-term, zloty denominated debt. While T-bill yields and WIBOR rates have fallen all year, there was one exception to this trend and this was the only time that the value of outstanding commercial paper declined.
On March 30 the T-bill rate went to 23.14% from 22.9% (March 23) and remained above 23% until April 20 when it decreased to 22.49%. During this period, WIBOR rose to 25.02% on March 16, up from 24.9% on March 13. It did not drop back below 25% until April 6.
March in turn saw the value of outstanding commercial paper drop by zl. 100 million to zl. 3 billion ($857 million) at the end of the month, the only time in 1998 this has occurred. In April with rates again falling outstanding commercial paper grew by 19.1%, its largest gain of the year, to finish the month at zl. 3.6 billion ($1.02 billion).
The decline in T-bill rates means that real yields have fallen as well, bringing them closer to German yields. Although Polish paper is still more expensive, currency risk is eliminated through the zloty-denominated programs.
"This is especially important after the recent financial crisis," said Dariusz Strojewski, head of capital markets at ING Barings. "
In addition, while markets are still unsteady companies can use commercial paper as bridge financing. The programs operate like lines of credit rather than traditional loans, allowing companies to only incur interest costs when capital is actually needed.
"It's a very convenient instrument," Strojewski said. "The issuer uses the money when it's necessary, the only thing he has to do is to call us."
