Tuesday, October 28, 2008

Fed Spurs Record Surge in Longer-Term Commercial Paper Issuance

(Bloomberg) -Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank's efforts toward unlocking the market may be working.

Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

``That's the very first really good news in quite some time,'' said Laurenti, who is based in Chicago. ``It's probably something the government can do and the normal investor would not otherwise do.''

The Fed began buying commercial paper from companies yesterday to reduce rates, lure back investors and unlock the market, which seized up last month following the bankruptcy of Lehman Brothers Holdings Inc. General Electric Co., which sold debt to the Fed yesterday, Korea Development Bank and Morgan Stanley are among several dozen companies that have signed up for the program, which was announced on Oct. 7.

Andrew Williams, a Fed spokesman in New York, declined to comment. The Fed is scheduled to report data for its new funding program on Oct. 30.

Companies sold $232 billion of commercial paper yesterday, the most in five years, with 29 percent maturing in more than 80 days, according to Fed data. That's the biggest percentage on record and compares with a previous high of 13 percent in 2002.

The previous daily record for commercial paper due in more than 80 days was set on Oct. 10, 2003, when companies sold $32.9 billion of the debt, according to Fed data.

Fed's Rate
The Fed today set the rate it's willing to accept for 90-day unsecured commercial paper at 2.89 percent, including a 1 percentage point credit surcharge, up 0.01 percentage point. The 90-day secured asset-backed rate is 3.89 percent, according to Fed data compiled by Bloomberg. The rates are set under the Fed's Commercial Paper Funding Facility and are available on CPFF.

``The facility is helping to free up money for investors to place in other assets and it is also reducing the corporate sector's dependency upon bank credit, freeing up money for the inter-bank market,'' Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co., in New York, wrote today in a note to clients.

Many companies use commercial paper, which typically matures in 270 days or less, to finance their daily operations. Lehman's bankruptcy filing on Sept. 15 caused the market to lock up, preventing many borrowers, particularly financial companies, from selling anything but overnight paper.

Market Shrinks
The commercial paper market shrunk by $366 billion, or one- fifth, to a three-year low of $1.45 trillion from Sept. 11 to Oct. 22, its worst slump on record, Fed data show. During the last recession seven years ago, the commercial paper market declined 17 percent from its then peak in December 2000 to September 2001, according to Fed data.

The surge in borrowing longer-term means more issuers, especially financial companies, will have fewer funding concerns through the end of the year, Laurenti said. The Fed is absorbing some of the ``stress'' in the market by buying debt from higher- rated companies, while distressed issuers are still locked out, he said.

``It's suggesting that the recovery and the healing is probably on the way but is proceeding very slowly,'' Laurenti said. ``It will take time to heal this market and make everyone feel comfortable.''

Helping `Stabilize'
The CPFF, along with a program to support commercial paper backed by assets such as auto loans and credit cards, appears to be ``helping to stabilize'' financial companies' access to the market, said Anthony Ryan, the Treasury's acting undersecretary for domestic finance.

``Commercial paper yields are adjusting, volumes across the maturity spectrum are expanding and maturities have lengthened, although we are still far from what might be called `normal' conditions,'' Ryan said today at a Securities Industry and Financial Markets Association conference in New York, according to prepared remarks.

The Fed also on Oct. 21 committed to provide $540 billion in loans to relieve pressure on money-market mutual funds, the biggest buyers of the debt.

General Electric
General Electric, the biggest U.S. issuer of commercial paper, threw its weight behind the Fed's plan last week to show support for the facility and began selling debt to the central bank yesterday, according to spokesman Russell Wilkerson.

American Express Co., Morgan Stanley and Korea Development Bank have also registered to sell debt to the Fed.

Quoted rates on 90-day commercial paper fell 15 basis points to 3.19 percent, according to yields offered by companies and compiled by Bloomberg. Rates on the highest-ranked commercial paper due in 30 days rose 6 basis points today to 2.94 percent, the highest in a week.

The average yield financial companies paid yesterday to issue 90-day commercial paper plunged 70 basis points to 2.55 percent, or 1.05 percentage points more than the target lending rate, according to the Fed, signaling the program may be working.

Historically the rates are about the same. Financial company yields reached a nine-month high of 3.99 percent on Oct. 6. By contrast, non-financial issuers paid 1.95 percent yesterday.

No comments: