Monday, October 27, 2008

U.S. Commercial Paper Rates Rise as Fed Starts Buying the Debt

(Bloomberg) Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank's efforts to unfreeze short- term credit markets have yet to take hold.

Rates on the highest-ranked 30-day commercial paper, which many corporations use to finance their day-to-day operations, jumped 25 basis points to 2.88 percent, according to yields offered by companies and compiled by Bloomberg.

The Fed created its program to buy 90-day commercial paper directly from issuers three weeks ago in hopes of reviving demand after the market seized up with the bankruptcy of Lehman Brothers Holdings Inc., preventing many borrowers from selling anything but overnight paper. The market has shrunk by one-fifth since Sept. 10, its worst slump on record, as investors shunned the debt and companies sought alternative financing. Several dozen companies including General Electric Co., Morgan Stanley and American Express Co. have registered to be in the Fed's program.

``It is having a positive impact on the ability of issuers to get longer-dated paper done, but it's not necessarily reflected in the broader market CP rates yet,'' Randy Harrison, managing director and co-head of short-term products at New York- based Citigroup Inc., said in an interview. The Fed's facility ``has started to have a positive impact on rates of longer-dated maturities of a few financial issuers.''

Fed's Rate

The Fed today set the rate it's willing to accept for 90-day unsecured commercial paper at 1.88 percent plus a 1 percentage point credit surcharge. The 90-day secured asset-backed rate was set at 3.88 percent, according to Fed data compiled by Bloomberg.

That compares with quoted rates of 3.34 percent for the highest-rated commercial paper and 3.19 percent for the debt backed by assets such as auto loans and credit cards, Bloomberg data show. The rates are set under the Fed's Commercial Paper Funding Facility and are available on CPFF.

Corporate borrowers are increasingly issuing longer-dated debt. Companies sold a daily average of $24.5 billion of paper due in more than 20 days last week, or 15 percent of total issuance, Fed data show. That compares with 7.4 percent a month earlier. Issuance of debt due in one to four days accounted for 77 percent of the total, down from 83 percent a month ago.

Yields on 30-day paper plunged to a four-year low of 1.92 percent on Oct. 22 in anticipation of the program and the Fed's other measures after reaching a nine-month high of 4.28 percent on Oct. 9, Bloomberg data show. At 2.88 percent, the debt still yields 1.38 percentage points more than the Fed's target lending rate. Before August 2007, the rates were about the same.

Market Shrinks

Companies cut their short-term borrowing for the sixth straight week, for a total contraction of $366 billion to $1.45 trillion, the Fed said Oct. 23, as investors balked at taking on the debt. The market is down 35 percent from its peak of $2.22 trillion in August 2007. About $1.3 trillion of commercial paper is eligible for the program, according to the Fed.

``This is an enormous backstop,'' Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York wrote today in a note to clients. With the Fed's moves, ``the commercial paper market will function better and it will stop the surge in the corporate sector's tapping of bank credit lines.''

The Fed's facility is primarily aimed at financial companies, which have been hardest hit by the credit seizure. Financial companies are paying an average of 3.25 percent to issue 90-day paper as of Oct. 24, according to the Fed. That compares with 1.91 percent for non-financial borrowers.

Lehman Bankruptcy

About 85 percent of the commercial paper issued last week by the highest-rated financial companies was due in one to four days, compared with 52 percent the week before Lehman's Sept. 15 bankruptcy filing, Fed data show. Only 1.5 percent matures in more than 80 days, compared with 25 percent before.

``It definitely helps financials more so than the corporates,'' Harrison said.

The Fed on Oct. 21 committed to provide $540 billion in loans to relieve pressure on money-market funds, the biggest buyers of the debt, its third action to unfreeze the commercial paper market. The measure supplements the Fed's СPFF plan, which was first announced on Oct. 7.

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, spokesman Russell Wilkerson said.

``There is a role for us and other large issuers to play here in demonstrating that this action is good for the market and very important for the buyers of GE paper as it provides a secondary market,'' Wilkerson said last week.

GE Capital

GE Capital Corp., the Fairfield, Connecticut-based company's financing arm, today is offering 3.1 percent on 90-day paper, about the lowest in five weeks. Bloomberg data show.

``It makes no sense for them not to borrow at 2.88 percent and to in turn take that money and buy in all their paper at 3.4 or 3.5 in terms of yield,'' Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said in a Bloomberg Television interview. ``It makes all the sense in the world.''

American Express registered to issue $14.7 billion of commercial paper to the Fed and may begin selling some as soon as this week, said Joanna Lambert, a spokeswoman for the company. The New York-based credit card company today posted a rate of 2.88 percent on 90-day commercial paper.

Torchmark Corp. plans to begin selling commercial paper to the Fed tomorrow, Chief Investment Officer Michael Pressley said in an interview. Torchmark had $250 million of commercial paper outstanding as of the end of the third quarter, he said.

``We've been able to issue what we want to issue, but it's just been more expensive,'' Pressley said.

Selling to the Fed will cut in half the 6 percent rate that the McKinney, Texas-based insurer has been paying recently to issue two-week paper, he said.

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