Capital Markets

Commercial Paper Boom to Continue: Study

The inverted yield curve and a hectic pace for mergers and acquisitions are two factors that should contribute to another double-digit rise, accord...
Stephen TaubFebruary 1, 2007

Total commercial paper outstanding is expected to rise 15.8 percent in 2007, to $2.29 trillion from $1.98 trillion, according to a new report from Standard & Poor’s.

That double-digit increase would follow an even larger surge in 2006, when the total rose 21.5 percent, from $1.63 trillion.

Two major factors behind the boom, observed Standard & Poor’s, are the inverted yield curve, which has pulled in many investors from the long end of the market, and a hectic pace for mergers and acquisitions, which is requiring many companies to put bridge financing in place.

Financial commercial paper outstanding is expected to climb 12.3 percent in 2007, to $852 million, but Standard & Poor’s expects nonfinancial issuance to rise just 1.8 percent. Even after last year, when nonfinancial paper outstanding jumped 26.5 percent, to $171 billion, “the strong cash balance position and relatively inexpensive longer-term financing” leaves that total far short of its record $350 billion, attained in August 2000.

Asset-backed commercial paper is forecast to reach $1.3 trillion in 2007, up from an already high $1.05 trillion in 2006. Standard & Poor’s observed that Basel II, which have lowered the regulatory capital requirements for off-balance-sheet exposures, will continue to provide a powerful incentive to securitize.

As for credit quality, Standard & Poor’s observed, 2006 was mixed.

Upgrades nearly doubled, to 34, from 19 in 2005; downgrades rose to 39, from 37. Though the ratings agency sees “little cause for any immediate concern,” it did warn that nonfinancial commercial paper ratings “were a shade more negative in 2006.” A total of 25 commercial paper programs are on negative CreditWatch, concentrated in the utility and media/entertainment sectors.