Eurocommercial Paper

A eurocommercial paper (ECP) is an unsecured, short-term loan issued by a bank or corporation in the international money market, denominated in a currency that differs from the domestic currency of the market where the paper is issued.

To tap into the international money markets, corporations may issue eurocommercial paper to raise capital. Like other commercial papers, eurocommercial papers are rarely issued for a term longer than a year. In effect, ECPs are debt instruments issued by a borrower that needs funds in the short-term. The notes have maturities that range from 1 day to 365 days, the most common time to maturity being 182 days.

In addition to their short-term maturities, ECPs are classified as unsecured debt. This means that interest payment or principal payment obligations on the notes are not guaranteed by collateral, making it an attractive source of financing for borrowers. This also means that in the event that the issuer defaults or goes bankrupt, secured debt holders with the company will be settled first before ECP holders. While these debt securities may be issued in interest-bearing form, they are usually issued at a discount to face value in the form of a promissory note and quoted in the secondary market on a yield basis.

Eurocommercial papers are usually issued in higher denominations of $100,000, with a minimum investment amount of $500,000. For this reason, the market is dominated by institutional investors who have access to these securities in the secondary market.

Issuers are particularly drawn to these debt instruments because the notes demand low interest rates. Since borrowers prefer to secure financing with as minimal cost of borrowing as possible, ECPs are an ideal source of capital. A distinct feature of these notes is that the currency they are denominated in differs from the currency of the market where the bond is issued. For example, if a U.S. corporation issues a short-term bond denominated in British pounds to finance its inventory through the international money market, it has issued eurocommercial paper. In this case, the U.S. firm seeks to encourage investment from pound-investors in the international money markets.

The settlement of eurocommercial papers is done through one of three clearinghouses, namely Euroclear, Clearstream, and The Depository Trust Company (DTC). ECPs are settled in two working days, and overnight settlement is not an option.