Published: December 03, 2024
The world’s first end-to-end automated commercial paper (CP) programme is making life much easier for Haniel Group’s treasurer, along with digital transformation and process evolution.
When Dr Axel Gros, Treasurer, Haniel Group, wanted to establish a new commercial paper (CP) programme to replace its aging existing setup, his first hurdle was to find an arranger. He struggled, despite approaching the group’s key relationship banks, to find any that were interested or even still offering this service. “It’s mostly the cost to them versus the liability,” he acknowledges of their reticence. “They like to trade, but they don’t like to arrange. We could probably have squeezed one into doing it, but that does not help our relationships.”
This is not bank belligerence aimed at a low-value client: Germany-headquartered Haniel Group is a respected investment-grade organisation, and one of Europe’s largest privately owned family businesses, with assets exceeding €6bn.
While Gros understands the issue banks may have with arranging CP, he feels that their reaction should not be to step back from the process, but instead to demonstrate to clients the value they can offer in this process. This applies when approaching and educating new investors, and offering guidance and technical support to clients. “If they can do that, then I’m happy.”
The chief hurdle around CP issuance is that the processes underpinning it are largely manual and inefficient. This state of affairs continues to deplete many banks’ appetite to act as arranger. Indeed, as the party that originates and syndicates the transaction, and provides expertise and assistance to issuers, CP’s antiquated process often see the arranger bank’s margins being cut to the barest minimum.
For Robert Koller, as Founder and CEO of platform provider NowCM, the first weighty issue to address is CP accessibility. For corporates wanting to issue CP and who don’t yet have a programme set up, or have an old programme that they wish to update, too many are indeed finding it hard to secure the services of banks to act as their arranger, he notes.
“These companies want to be guided by an organisation that knows the process and what is required. But for a bank, setting up a programme takes a lot of time, and the range of fees is barely sufficient to justify their effort”, he comments.
The role of arranger is not currently a regulated function. This has enabled NowCM and its legal partner in Germany, White & Case, to leverage their shared knowledge and experience of setting up ‘arrangerless’ CP programmes as they seek to “take away this pain from both sides, opening up access to CP markets for corporates”. (See box: Arrangerless explained.)
With banks often turning away from CP issuance, and the need for an arranger still very much on the agenda for many corporates, NowCM has created a special purpose entity in Luxembourg, NowCM Luxembourg. Regulated as a compartment company (or protected cell company, in English law), it acts as a single legal entity divided into multiple compartments, each with assets and liabilities legally segregated from the others.
“The structure requires only one set of directors, auditors, management and so on, but within it we can create a ring-fenced compartment for each corporate that wants to go to market,” explains Koller. The system, which has been used many times since it was introduced some 20 years ago in Luxembourg, enables NowCM Luxembourg to legally act as issuer on behalf of each client compartment. It thus takes on all the administrative, legal, listing, clearing, and payments duties.
All CP is still guaranteed by the underlying corporate so that if there is a non-payment issue, for example, investors have direct legal access to that corporate. The corporate receives the same fund amount, and under the same conditions, as if it had issued the CP, but it all comes via NowCM Luxembourg as its legal third-party provider.
One further advantage of using the compartment-company approach to CP issuance is that it exempts the issuer from significant financial reporting changes. As Koller comments: “The change from national GAAP [generally accepted accounting principles] to IFRS can be a huge knockout criteria for issuers, but by being the guarantor, and us being the legal issuer, that no longer applies. This makes access to bonds and CP markets easier and more cost efficient”.
Arrangerless CP is not a push to disintermediate banks, insists Koller. Indeed, placement can still be handled by banks, which, it seems, remain keen to act as dealers. But while NowCM’s intervention could be advantageous for all parties, simply shifting roles does not in itself explain the need for CP digitisation.
“At the moment, CP is traded manually over the phone, then a bank employee types it into a term-sheet, before sending it to the issuer, if the bank is not producing the documentation in-house,” explains Koller. In many cases, he says, paper documents are still posted to participants. Herein lies the need for progress.
While France’s Negotiable EUropean Commercial Paper (NEU CP) is fully digitally native, in most other markets the documentation process remains as described: almost entirely manual. “PDFs are exchanged, errors occur, and there is no dataset that can be fed into treasury software or the clearing system,” he explains. “It’s all very tight on timing, but of course, treasurers want their money as soon as possible because CP is a short-term liquidity instrument.”
NowCM’s NextGenCP platform, launched in 2024, is able to generate the entire documentation set automatically, once the trade is generated. The issuer can, if it wishes, review that documentation before signing it off (see box: A point of law). The arrangement is then automatically sent to the paying agent’s clearing system, and stock exchange if the issuer is listed. “There’s literally nothing more to be done manually in that respect,” states Koller.
Standard CP documentation has been developed to overcome the inefficiency of variations across markets, mindful of further reducing the cost and time to market for participants. The legal documentation will be familiar to, and recognised by, most banks, suggests Koller.
As a trained lawyer himself, Koller worked alongside White & Case Germany to incorporate most of the common elements so that the standard document can be easily reused, with automated setup, across each use case. The legal framework established covers all aspects of CP issuance, including the paying agency agreement and the deal agreement.
As with most international investors, Koller says one form of law is preferred. “Before Brexit, everyone in the EU wanted English law. Today, we consider German and French law to be the dominant legal systems, and offer both so that issuers can more easily sell paper to investors in both countries.”
Plans to incorporate English law are on the agenda. NowCM has already developed standard documentation for bond and Euro Medium Term Note (EMTN) programmes with Clifford Chance for English law, as well as White & Case for German law, and CMS for French law. CP will follow.
However, the remaining manual component is CP trade. This is typically executed via phone or Bloomberg chat, and then loaded into a Word document to PDF. It’s on the radar, says Koller. “We can digitise it because we run a regulated multilateral trading facility in Paris where clients can negotiate trade, and agree on the CP terms, online,” he explains.
By delivering an online trading option, once both parties click to agree, a term-sheet containing structured data can be automatically generated. This can then be sent to the different stakeholders, thus removing all manual interventions. With structured data accessible from the beginning, it can be fed directly into a TMS or other core system.
By automating the entire CP process, and knowing everything is in place, Koller suggests that treasury is empowered to go to market at a point that suits it best, rather than being at the mercy of long and unpredictable process lead times. “It becomes almost near real-time,” declares Koller. “And although most clearing systems can’t yet manage real-time, this at least makes T+1 settlement viable, enabling treasurers to secure their money quicker.”
With the search on for an alternative, Haniel revisited the work it had carried out with NowCM three years ago on a euro medium-term note (EMTN) programme. “We thought we could just copy what we did with that solution for CP, because it should be the same, but it isn’t. In fact, the difference is considerable on the transactional side,” notes Gros.
NowCM’s NextGenCP offering made a timely appearance in early 2024 with its arrangerless programme. With White & Case’s ongoing (because new regulation always needs to be incorporated) efforts towards standardised legal structuring and verification, it spurred Gros into action.
“The platform had all the building blocks checked and ready,” he recalls. “We just needed to add the information required for our compartment within NowCM Luxembourg, such as the guarantor description, and most of that came from our annual report.”
Gros admits that the initial due diligence and setup for the arrangerless programme “took us a long time”. But now, if he wants to issue a new CP programme, he says everything is in place for rapid issuance. “Even if new regulation is enacted, White & Case will already have incorporated that into the base documentation. We then just ask NowCM to press the button to produce a new programme in no time at all and can trade again the next day.”
Initially Haniel started with two CP dealers on the platform. It now has two more onboarded, and there are a couple of other dealer banks that are also interested in joining the platform to sell Haniel’s CP to investors, says Gros. “We normally talk to the dealer banks on the phone first, but once they know we are ready to go, the rest is automated. It’s starting to make CP an everyday product.”
CP is typically a one-to-one trade for Haniel, he continues. “We’re not listed, so it’s a name-dropping exercise for us. Currently, we have many investors here in Germany because they know Haniel Group.”
The aim is to reach further out into the professional investor community. This is why Gros has onboarded a French bank as one of Haniel’s new dealers. “The French CP market is much larger than the German because many of their MMFs and other specialised vehicles are looking for CP. Potentially, we can enlarge our investor base with this programme.” The approaching adoption of English law into the standard documentation could see Haniel’s investor base expand even further.
“We needed to get our heads around the compartmented structural approach, but we knew from experience that many asset managers are using it. They would set up a managing company and then arrange each fund underneath in its own compartment. Once we understood that, we knew we could also use it on the passive [financing] side of our balance sheet.”
It’s one thing Haniel coming to grips with the concept but would its investors fall into line too? “Initially, some found it somewhat strange,” recalls Gros. “But we have a full-fledged legal guarantee, so whether we issue, or the compartment does, the guarantee ensures nothing changes for the investor.” In fact, he adds, many of Haniel’s institutional investors were already familiar with the idea, either running a compartment themselves or using one for other asset management purposes.
Of course, Gros understands the need to educate its expanding investor base on the use of this special vehicle. “Once we talk it over with them, and they talk to their legal teams and can see there is no difference, they soon want to talk about the more serious matter of the rate.” That approval box needs ticking only once, he adds, and the more investors use the compartment structure, the easier it will become to explain. “I hope that many other companies will go the same route because then it becomes common practice.”
Haniel issues CP of around €1bn per year, on a recurring basis. Its current outstanding volume is around €100m to €200m, with maturities of between one and three months and, exceptionally, six months. Since using NextGenCP, it has issued several double-digit million amounts in various transactions.
The plan now is to further explore the proposal to incorporate a trading platform within the platform. In the meantime, NowCM has already created a data repository, with Haniel simply needing to put a link to it on its own website to enable clients to use it. Doing so ensures the accessibility of all up-to-date legal documentation. “It helps immensely in investor education,” notes Gros. “If an investor makes an enquiry, they can find all they need via our website. And they can call me if they have any further questions. These are really easy steps.”
With the platform and its set up evidently working well, Gros comments that if Haniel has to update a CP programme, it’s “a piece of cake” to execute. “Normally, it takes at least a month or two of effort to renew a programme. And we often have to pay huge amounts to a law firm because they want to interact on a one-to-one basis. All that pain has now gone.”
Indeed, his expectation is that while there’s always “a little bit here and there to do, especially if you try something new”, the CP process will require progressively less work for Haniel’s team. “If we tune all of the components correctly now, we can take further steps forward, and become even quicker at executing deals.”
The bottom line for Gros is that NextGenCP “makes life easier”. It is, he feels, a platform that can be built upon for the future. “You could start with the documentation platform, or with the trading platform if you have another programme underway, and then move towards other functions. It really is a quicker, and cheaper, step-by-step approach to moving closer to your investors.”
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