Capital Markets

Paper Cut Stings Financial Firms

The market for their short-term debt swoons, while non-financials are flat.
Stephen TaubOctober 2, 2008

Driven by the inability of banks and insurers to find many buyers for their short-term debt, the volume of commercial paper outstanding plunged by almost $95 billion for the week ended Oct. 1, Bloomberg reported.

It was the third straight weekly decline for commercial paper, which fell to $1.6 trillion. The market peaked in August 2007 at about $2.2 trillion, according to JPMorgan Chase.

Issuance at non-financial firms was essentially unchanged, falling slightly to $199.1 billion. However, financial paper plunged by $64.9 billion to a two-year low.

“The purge is broad and is impacting issuers with far more predictable cash flows — regular run-of-the-mill companies in need of working capital,” Tony Crescenzi, chief bond market strategist for Miller, Tabak & Co., reportedly wrote in a report to clients. “The declines add to the urgency for fixes to the credit crisis and bolster the case for a Fed rate cut.”

The volume of short-term debt backed by assets such as mortgages and car loans fell 3.9 percent, to a seasonally adjusted $724.7 billion.

The biggest decline has been in asset-backed commercial paper (ABCP) outstandings, which have fallen about 40 percent from a peak of $1.2 trillion in August 2007, according to JPMorgan Chase.

Indeed, the bank asserts in a report, “While the asset backed commercial paper market has been under intense scrutiny since the start of the liquidity crisis, the market for unsecured CP has largely escaped notice, until now.”

JPMorgan also notes that based on the flow of investor questions it has received, there is a perception in the market that CP issued by non-financial corporate issuers is unable to roll over, and as a result many issuers are drawing on their bank lines.

However, JPMorgan asserts that it is almost universally not true that high-grade non-financials are unable to roll commercial paper. “While there may have been isolated cases of corporate CP issuers drawing on bank lines (something that is difficult to know with certainty since these agreements are generally nonpublic) we are not aware of any situation driven specifically by the inability of an issuer to roll CP,” the bank says.