The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.
The market for company debt due within nine months has plunged 28 percent since April 8 to $1.1 trillion, its longest and deepest slump, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September’s collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies’ need for short-term credit to expand.
Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed.
“You’re not going to build that plant, you’re not going to expand, you’re not going to hire folks,” said Brian Kalish, a director at the Association for Financial Professionals, which represents 16,000 corporate treasurers, bankers and investors. “We’re creating this world of haves and have nots.”
More than 60 companies sold bonds this year to repay commercial paper, including Consolidated Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace.
“Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”
Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.
The
Commercial Paper Falls at Record Pace
by ilene - July 16th, 2009 10:30 pm
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Commercial Paper Falls at Record Pace
Courtesy of Mish
Corporate borrowing costs continue to climb along with the steep plunge in commercial paper. Please consider Commercial Paper Falls Most Ever.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
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