Commercial Paper Rolls Over at Higher Costs


Bankers are refinancing $100 billion-plus of commercial paper debt maturing into next week without major troubles so far, but borrowers are facing shorter maturities and higher costs as liquidity and confidence remain in short supply.

Problems in the commercial paper market, which typically provides 3- to 6- month rolling finance to highly-rated companies and investment funds, stem from investor concerns about ABCP (asset backed commercial paper) -- where fears of losses linked to battered U.S. subprime mortgages have seen many lenders boycott the market.

An estimated $113 billion of euro commercial paper (ECP) falls due by next Tuesday. The heaviest day for maturities is Monday and funding for this will need to be arranged this week due to settlement horizons.

Bankers and traders say the crisis scenario feared last week was not playing out -- partly thanks to expectations for a Federal Reserve interest rate cut -- and financial institutions are not hoarding liquidity as much.

Quality commercial paper, such as that issued by governments, has rolled over relatively smoothly but ABCPs are still having difficulties and borrowers are being forced to take shorter maturities, for example around a day to a week, compared with the average 30 days for ECPs.

"The market is rolling over, but it's a very short term roll. It's very difficult to do long-term. There's bottom-line cash there but it depends on what type of CP we are talking about. Some names get through the market easier than others," said Padhraic Garvey, fixed income strategist at ING.

"Things haven't got better but things haven't got worse. But it's not that if we get through this week it's going to be fine. It is true the third of week of the month is typically a busy week. In four weeks time we will have the same third week of the month issue to get through."

A Little Better

In the CP market, banks and companies regularly raise cash for operations by issuing paper that often matures in six months or less. When commercial paper comes due, the corporate borrower repays investors by "rolling over," or issuing more paper, effectively paying back investors with more borrowed cash.

"The last couple of days have been considerably better than they were last week. The 3-month tender by the ECB yesterday definitely did help the situation considerably short term," said a London-based credit strategist. "It's clear that the market is far from normal but it's looking a little bit better than it was last week."

Garvey said CP issued by governments -- the safest commercial paper -- makes up of around 5-10% of the total CP market.

Troubles in the CP market have pushed up interbank lending rates sharply. Interbank lending rates can have ramifications beyond the banking sector -- some UK mortgage lenders including the country's largest, Halifax, raised rates as a result of high market rates.

Royal Bank of Scotland estimates around 44 billion pounds ($88 billion) of commercial paper mature on Thursday, about half of which is ABCP. The bank said around this time last month only about half the total CP market was rolling.

Earlier, Rick Watson, head of the European Securities Forum, told Reuters that investors are showing signs of returning to the ABCP market. The forum arranged a call on Wednesday to set out steps that the industry could take to boost transparency and help restore market confidence.

Ratings agency Moody's also said on Wednesday its analysts expected the market for bank-sponsored ABCP to ride out the current market turmoil.

Federal Reserve data showed a rapid shrinkage in U.S. commercial paper slowed in the latest week in a possible sign that troubles in this part of the credit market might be abating.