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This time, the CP revival may not be pulp fiction Print E-mail
Thursday, 20 August 2009

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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