Capital Markets

Commercial Paper to Stay Strong: S&P

Financial issuance should grow this year and next, according to the rating agency, while asset-backed commercial paper seems likely to tack on anot...
Stephen TaubMay 8, 2007

The U.S. commercial paper market should remain strong through the end of 2008, according to a new report from Standard & Poor’s.

Total commercial paper outstanding rose to $2.03 trillion at the end of the first quarter, 20 percent more than a year earlier. Financial issuance was up 16 percent, year on year, and is expected to grow in both 2007 and 2008, wrote S&P.

Asset-backed commercial paper, which reached the $1 trillion mark, should tack on another $300 billion in 2007, according to the credit-rating firm. “The rising share of the market being securitized implies that the market is not yet mature,” it asserted.

S&P also expects securitization to continue to rise. It explained that Basel II regulations are expected to boost asset-backed commercial paper, as the decrease in regulatory capital requirements for off-balance-sheet exposures offers a powerful incentive to securitize.

On the other hand, noted S&P, non-financial issuance is currently at $169 billion, down from $171 billion at December 2006. S&P projected that 2007 will be a down year for non-financial commercial paper; corporations have abundant cash balances, and the demand for durable goods will likely slow with the economy, according to the report.

While S&P expects new issuance to remain generally strong, the rating agency pointed out that credit quality slipped slightly in the first quarter, with 10 downgrades — all in the non-financial sector — and only five upgrades.

As a result, S&P’s downgrade ratio, defined as the ratio of downgrades to total rating actions — rose to 66 percent for the year to date from 53 percent for the year-earlier period. (A higher number represents more downgrades as a percent of the total, and represents a decline in credit quality.)

In the near term, 24 companies are on CreditWatch with negative implications — including 12 utilities — while only three companies are on CreditWatch with positive implications.

Meanwhile, the 90-day prime rate for commercial paper is currently 5.2 percent. S&P’s report asserted that with Fed rate cuts expected at the end of 2007 and in 2008, the yield is expected to edge downward toward a range of 4.9 percent to 5.15 percent late this year or early next. S&P projected a rate of about 4.6 percent by the end of 2008.