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Credit Crunch Eases, But Aftershocks Linger

The late summer global credit squeeze is showing further signs of easing, though the aftershocks are still being felt from homebuilders to hedge funds.

Issuance of commercial paper by U.S. financial firms rose by the most since July this week, while London interbank deposit rates for three-month euros fell for a seventh straight day on Thursday.

A home is advertised for sale at a foreclosure auction in Pasadena, California.
Reed Saxon
A home is advertised for sale at a foreclosure auction in Pasadena, California.

Foreclosures on U.S. mortgages also fell in September, but lenders continued to lay off staff, while credit rating agencies downgraded some U.S. homebuilders.

"People have been assuming there would be continued improvements in the credit markets, and here they are," said Tony Crescenzi, chief bond market strategist, Miller, Tabak in New York.

Mounting losses on U.S. mortgage related securities earlier this year hit the balance sheets of banks and hedge funds around the world, leading to the worst global credit squeeze in
a decade, forcing central banks to inject liquidity into short term money markets in late summer.

However, overall U.S. commercial paper outstanding increased to $1.865 trillion in the week ended Oct. 10, up $4.9 billion from $1.860 trillion the previous week, the second consecutive weekly gain, according to the Federal Reserve.

Commercial Paper Booms

U.S. financial corporate commercial paper issuance posted its biggest weekly increase in 12 weeks, rising by $15.1 billion, suggesting money markets may be on the mend.

London interbank deposit rates for three-month euros fixed lower for a seventh day in a row on Thursday, while sterling rates also eased.

The improved borrowing conditions came as TXU said pricing on its $24.5 billion senior secured bank loan will be at 350 basis points over the three-month London interbank offered rate, or Libor, according to Reuters Loan Pricing Corp.

The U.S. energy group also said pricing on its $11.25 billion in senior unsecured bridge loans will initially range from 325 basis points over Libor to 425 basis points over Libor, depending on the tranche.

The loans are to finance its takeover by Kohlberg Kravis Roberts, Texas Pacific Group, and Goldman Sachs Capital Partners, which closed on Wednesday. Loan investors expect marketing of the deal may begin Monday.

The financing of the TXU deal is the next big test for credit markets after First Data Corp sold more than $9 billion in term loans to finance its $26 billion takeover by KKR.

Countrywide Loans Fall

Weakness in the U.S. housing market continued to be felt by lenders though, as the largest U.S. mortgage lender, Countrywide Financial, said Thursday it funded fewer mortgage loans in September. Countrywide funded 44.3 percent fewer mortgage loans last month and cut jobs to cope with lower lending volumes and increasing defaults. Fundings of adjustable-rate mortgages slid
76 percent, while nonprime loan fundings, including subprime, tumbled 92 percent.

M&T Bank, the first large U.S. bank to report earnings this quarter, said third-quarter profit fell 5 percent, as losses from mortgages surged.

JPMorgan Chase also said it had notified staff of job cuts in its investment banking division, sources said, with investors expecting large write-downs at the third largest U.S. bank after big write-downs at rivals such as Bear Stearns and Merrill Lynch.

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Recent improvement in credit markets may be short-lived though, JPMorgan said in a research report, with the worst yet to come.

"Even though we think that the downturn is still not imminent, we may be one step closer," the report said. "Bankruptcies are intrinsically linked to the availability of credit, and turbulence in the financial markets will ultimately impact credit quality."

Foreclosure filings on home loans fell 8.0 percent in September from a 32 month peak in August, but are up 99 percent from a year ago, said RealtyTrac, an online market of
foreclosure properties.

Foreclosure filings in September fell to 223,538, representing one in every 557 households, led by California, Florida and Ohio, according to RealtyTrac.

"It's too early to tell if September's numbers represent a one-month lull or if they could signify that more buyers and investors are getting back in the market," James Saccacio, RealtyTrac's chief executive officer, said in a statement.

In rating actions, Moody's Investors Service cut its credit ratings on home builders Centex, Lennar and Pulte Homes to junk status, saying it expects bleak housing industry conditions to linger at least until 2009.

The downgrades affect about $9.4 billion of debt and $3.25 billion of commercial paper authorizations, Moody's said.