Capital Markets

Commercial Paper Bolstered by M&A, Capex

Merger deals, capex, and tighter profits will keep the corporate commercial paper market humming, even as corporate bonds issuance slips.
Marie LeoneJanuary 9, 2008

Mergers and acquisitions, capital investment, and a little help from central banks are breathing new life into a traditional form of short-term corporate borrowing. Nonfinancial commercial paper — that is, short-term debt issued directly by commercial or industrial companies, rather than through conduits — is set to reach $225 billion this year, an 18 percent increase over last year’s total.

That forecast, released by the Securities Industry and Financial Markets Association, says growth in non-financial CP is being spurred by several factors, including rate reductions and other moves by both the Federal Reserve and international central banks to free-up liquidity. SIFMA says demand for M&A deals also will help keep CP issuance higher this year. Despite predictions that 2008 M&A volume will lag 2007, a larger percentage of those deals are expected to be done by corporations instead of private equity firms. And SIFMA says growth in capital investment spending will also bolster the need for CP. While some companies affected by the credit crunch have reported plans to delay or slow capital spending, the latest Duke University/CFO magazine Global Business Outlook Survey still predicts that capital spending will grow four percent in 2008.

The SIFMA forecast is based on a survey of analysts and strategist from 20 securities firms.

However, the predicted growth spurt for nonfinancial CP won’t have a knock-on effect in the rest of the credit markets, says Michael Decker, the forecast’s lead author and senior managing director of research at SIFMA. Indeed, he says fears of a weakening economy and healthy corporate balance sheets could yet quell the need for outside funding, even as slower profit levels heat-up demand for incremental short-term funding. That seesaw effect is likely to keep nonfinancial CP volume relatively steady during 2008, similar to what happened in 2007.

In 2007, nonfinancial CP volume “spiked” in the middle of the year, but “fell off by 20 percent since those highs” to end at $191 billion, as of November 30, 2007, Decker told Nevertheless, “There is a market for high-quality commercial paper, and investors view it as a value asset,” added Decker.

The forecast for all forms of CP, which includes the vast amounts of securities backed by mortgages, is not as bright. Outstanding volume of all CP categories — financial asset-backed, financial non-asset backed, and nonfinancial — will decline slightly from $1.9 trillion to $1.8 trillion by the end of 2008.

In fact, fallout from the subprime meltdown contributed to a 30 percent drop in asset-backed commercial paper (ABCP) volume alone, in 2007. The forecast predicts a continued decline for this category to $710 billion by the end of 2008, down from last year’s $837 billion. Decker emphasized that investors remain “skittish about ABCP backed by subprime mortgages,” and are scouring fixed-income conduits to make sure there is no exposure to the problem investments.

Regarding the long-term credit market, the forecast predicts a 15 percent slip — from $1.1 trillion to $965 billion — in corporate bond issues in 2008. Investment-grade bond volume is expected to total between $750 billion and $900 billion this year, with more issuers rated above “A” participating in the market. Meanwhile, junk bond volume will range between $95 billion to $120 billion, with more issuers rated “B” and above in the market.

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