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By John Goff
Will
the second week in August be remembered as the moment the U.S. commercial paper
market came back to life?
It’s
possible, at least if you give any credence to the latest data coming out of the
Federal Reserve. The Fed’s numbers show that the CP market actually expanded
last week—and by a considerable bit. Indeed, the amount of commercial paper
outstanding for the week ending Aug. 19 increased by nearly $36 billion. That’s
the biggest bump up in short-term paper issuance in four months.
Bear
in mind, that’s about half where the CP market was at its peak, in August 2007.
That month, with U.S. corporates in full expansion mode, commercial paper
outstanding was a whopping $2.2 trillion.
The
latest numbers may mark a turning point in short-term corporate issuance. Not surprisingly,
non-asset backed paper fueled the increase last week, with outstanding issuance
up more than $38 billion. That comes after a $12.1 billion increase the week
before.
The
CP market imploded in September, when the Reserve Primary Fund broke the buck,
triggering a run on money-market funds. Typically, such funds invest a chunk of
their money in short-term corporate bonds.
From
early April to early-July, the CP market shrank at a record pace, down 28
percent. And the bulk of that issuance came from top-rated borrowers.
Given
the steep interest rates demanded by CP investors—and given the uncertainty of
the market--many larger businesses have issued bonds to take out their
commercial paper. More than 60 companies—including Verizon and Kellogg—have
sold bonds this year to repay CP issues.
According
to Bloomberg, non-financial companies sold $306 billion of investment-grade
bonds in the first half of the year, a record pace.
“Treasurers
aren’t sleeping at night because they don’t know if they can roll over
commercial paper,”Anthony J. Carfang, a partner at Treasury
Strategies, told Bloomberg in a recent interview. “They’d rather lock in money
for five years and pay a little more.”
Nevertheless, the
Fed’s latest figures would seem to show corporates are once again testing the
CP waters. That’s understandable. For corporate treasurers, issuing commercial
paper is a much more efficient way to meet short-term funding needs than
relying on credit facilities.
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