Capital Markets

Commercial Paper Market Improving

The total dollar volume of commercial paper outstanding between 2001 and 2003 fell by 40 percent, to $571 billion.
Stephen TaubNovember 9, 2004

The commercial paper market is slowly recovering. Although the number of downgrades still continues to far exceed upgrades, the gap has been narrowing for nearly two years after posting record short-term credit rating downgrades and defaults, according to Moody’s Investors Service.

The ratio of short-term rating downgrades to upgrades improved to 11:1 in 2003 from a historic peak of 15:1 in 2002, according to the credit rating agency. This was the first year of improvement since 1999. This trend has continued in 2004, with three downgrades per upgrade registered from January through August, according to Moody’s.

“The downgrade-to-upgrade statistics show just how severe the deterioration in short-term credit quality was,” said analyst Sharon Ou, in a statement.

To underscore the magnitude of the commercial paper market’s collapse, Ou noted that the downgrade-to-upgrade ratio was less than 1:1 in 1995, “so the last credit cycle was severe indeed.” She pointed out that between 2000 and 2002, there also was a large increase in so-called fallen angels — companies whose credit ratings were reduced from investment grade to junk — and investment-grade defaults.

As a result, the total dollar volume of commercial paper outstanding between 2001 and 2003 fell by 40 percent, to $571 billion.

The total dollar volume of defaulted commercial paper reached an all-time peak of over $1.4 billion in 2001, easily surpassing the previous record of $493 million set in 1994, according to Moody’s.