More Signs Of Healing In Short-Term Corporate Lending

Discussion in 'Economics' started by BoyBrutus, Oct 28, 2008.

  1. More Signs Of Healing In Short-Term Corporate Lending
    Last update: 10/28/2008 2:22:35 PM
    By Anusha Shrivastava
    NEW YORK(Dow Jones)--Preliminary indications show that the Federal Reserve's new program to ease short-term lending conditions for U.S. companies is working.
    Fresh data from the Federal Reserve showed that companies raising funds for more than 81 days in the commercial paper market soared Monday, while on Tuesday more borrowers posted three-month rates they were willing to pay investors in the open market, using the central bank rates as their benchmark.
    The Fed's program, the Commercial Paper Funding Facility, is aimed at unclogging short-term funding markets by providing a safety net for highly-rated companies looking to raise three-month funding for their day-to-day needs like rent and supplies.
    For weeks, companies had struggled to obtain funds for more than one day, but that changed Monday when the Fed's program became operational.
    The total amount borrowed for debt maturing in 81 days or more shot up to $67 billion from $7.36 billion Friday and just $3.6 billion Thursday, according to Fed data released Tuesday.
    The data doesn't specify who did the lending, but market participants suspect that the central bank bought the bulk of longer-term commercial paper sold by companies on Monday.
    The Fed will release weekly data detailing the amount tapped from its newly launched facility on Thursdays.
    "Presumably most of it was due to the CPFF," said Ira Jersey, interest rate strategist at Credit Suisse. "If you look back at issuance trends, that is what it looks like because on most days, issuance has not been more than $10 billion."
    The asset-backed segment comprised a substantial chunk of Monday's longer-term borrowing at $27.7 billion, up from $2.5 billion Friday.
    "It's a good sign that issuers are using the facility and that they were able to finance over the year's end," said one trader at a primary dealer. "This program was needed to unclog this system."
    The number of issues that came to the market Monday was 1,511 compared with 623 Friday.
    The total outstanding for debt maturing in one to four days on Monday stood at $132 billion versus $128 billion Friday. Total borrowing Monday stood at $232 billion, versus $160 billion on Friday.
    Companies like General Electric (GE) and American Express (AXP) have said they have signed up for the program.
    While GE has said it tapped the Fed's facility on Monday, spokesman Russell Wilkerson declined to disclose the amount. "We'll assess our needs and access the facility as appropriate," Wilkerson said. "We believe the facility is good for the market and for our investors and for us."
    A spokeswoman for American Express said the company "intends to use the facility" but it hasn't decided when it will do so or for how much.
    Fed's Rate Serves As Benchmark
    A second indicator that the Fed's program is having an impact in the market is that on Tuesday, rates offered in the commercial paper market for three-month debt are hovering around what the Fed is offering companies looking to borrow from the bank.
    This indicates the Fed's rate is serving as a benchmark for the $1.45 trillion commercial paper market. Issuers offering rates higher than the Fed's rate are doing so to incentivize investors to buy their debt so the companies don't have to turn to the Fed without first dealing directly with investors.
    Some issuers are matching the Fed's effective rate of 2.89%, while others are offering slightly higher rates in the effort to increase their investor base.
    Issuers who are offering rates up to 3.05% Tuesday are probably making a "conscious business decision to grow the investor base because companies can't keep using the Fed as a crutch," said Kevin Giddis, head of fixed income at Morgan Keegan in Memphis, Tenn. "It is better to engage the investor."
    In the asset-backed segment, higher-rated issuers are offering rates slightly lower than the Fed rate of 3.89%, but the lower-rated companies are posting rates around 4%, the trader said.
    The volume of trading is also slightly higher than it was on Monday, market participants said.
    -By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;
    Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: You can use this link on the day this article is published and the following day.
    (END) Dow Jones Newswires
    October 28, 2008 14:22 ET (18:22 GMT)
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