Loading Up on Corporate Paper

The corporate commercial paper market is thriving, as issuers rebalance their debt profiles and investors embrace safety.
Vincent RyanJuly 28, 2011

Short-term debt is in favor again at nonfinancial corporations. Issuance of commercial paper (CP) in the sector grew to $210.2 billion on July 20, up from $185.7 billion at the end of June, according to seasonally adjusted data from the Federal Reserve.

What’s more, 35 U.S.-based nonfinancials increased their CP usage as a percentage of total debt in the past year, according to data provided by Capital IQ. Many did so in dramatic fashion: 14 of the 35 at least doubled their issues of CP as a percentage of their total outstanding debt.

The 10 nonfinancials that grew CP borrowing the most in the one-year period ending March 31, 2011, were Deere, Devon Energy, Northwest Natural Gas, Avon Products, Dominion Resources, Enbridge Energy Partners, IdaCorp, Wisconsin Electric Power, Ecolab, and SCANA. (See the table below for the top 25 issuers.)

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The overall corporate CP market has doubled since the fourth quarter of 2009, and the growth story continues, says Rob Little, head of global fixed income origination at Bank of America Merrill Lynch. Spreads remain low: a high-quality Tier 1 corporate can borrow at between 8 basis points and 11 basis points for one month. Nonfinancials can borrow out to three months, with some high-quality issuers able to extend as far as four to six months.

Helping to drive supply are companies seeking to rebalance their debt profiles by increasing their short-term floating-rate debt, says Little. After financing via long-term bonds in 2009, “companies might not want to rush back in and refinance in the term market,” he says. “They want more of a balance between short- and long-term funding.”

If there wasn’t general uncertainty in the financial markets, leading to fewer strategic mergers and acquisitions, CP-issuance volume might be even higher, says Little. (Strategic acquirers sometimes use CP as a form of interim financing.)

Investors have had no trouble consuming the higher supply of paper, in part because they view corporate CP as a safe haven, says Little. And Little doesn’t think the anxiety over a possible U.S. debt default will cause CP spreads to rise significantly, unless the situation leads to a double-dip recession that derails corporate performance.

Despite the corporate CP market’s growth, it still hasn’t brushed the heights of 2007, when corporate CP outstanding hit $278 billion at year’s end.

During the financial crisis, the commercial paper market froze up. The Federal Reserve was forced to provide a liquidity backstop to U.S. issuers through a special-purpose vehicle, which purchased three-month unsecured and asset-backed CP from eligible issuers.