Capital Markets

Commercial Paper Finds Steady Ground

The Fed's paper-buying program seems to be working. Now some major companies with less-than-stellar credit want in as well.
Stephen TaubNovember 14, 2008

The size of the commercial paper market held steady at $1.6 trillion outstanding for the week ended on Wednesday, according to the Federal Reserve. The total still is down from $1.82 trillion nine weeks ago and the peak of $2.2 trillion during the summer of 2007.

But now it looks like nonfinancial companies — whose commercial paper volume has been only about one-third that of the financial sector — are starting to boost their presence in the market, albeit slowly. Volume among these issuers climbed nearly 5 percent, to $204.6 billion. In fact, a number of major nonfinancial companies that don’t enjoy the highest credit rating also want to enter the market.

According to Bloomberg News, a group of large, well-known companies is lobbying the Federal Reserve to expand its commercial paper purchase program. Under that program, announced last month, the Fed is buying U.S. corporate three-month, asset-backed paper with sufficiently high ratings — at least A1, P1, or F1 by a major rating agency. Highly rated financial firms such as American Express and General Electric have been among the biggest users of the program.

Now companies including Textron, Home Depot, Honda, Dow Chemical, and Nissan, each of whose paper is the second-highest grade, are asking the Fed to buy, Bloomberg writes. They argue that the program’s current parameters are putting them at a competitive disadvantage.

As proof of that point, Bloomberg notes that interest rates on the highest-ranked 30-day commercial paper have fallen to 1.04 percent, from a high of 4.28 percent on October 9. However, rates on second-tier paper are 5.36 percent, compared with a high of 6.30 percent on October 15.

The Fed “needs to make sure that any program doesn’t have an unintended consequence that really conflicts with what it’s intended to do,” Holly Koeppel, CFO of American Electric Power Co., told Bloomberg.