US: Credit Market

Credit Jitters Spreading--Even to Candy Makers


Investor jitters about credit markets edged up a notch Thursday after U.S. asset backed
commercial paper issuance shrank for a 10th straight week in spite of a plan by key banks to shore it up.

A major Wall Street bank's earnings miss added to nervousness that the past two months' fallout from faltering lending markets was far from over, while tighter credit conditions appeared to sour a candy maker's prospects.

The total asset-backed market has withered by as much as 25 percent from its record size in early August, and now stands at its smallest in 18 months, Federal Reserve data showed Thursday.

"That's a dead market," said Howard Simons, strategist with Bianco Research in Chicago of the housing-related areas of asset backed commercial paper.

Overall Increase

The overall U.S. commercial paper sector did increase $1.3 billion to $1.866 trillion in the week ended Oct. 17. But asset-backed commercial paper, the hardest hit sector in the crisis because of its links to housing, fell $11.0 billion after a $6.8 billion decline the previous week.

Commercial paper is a vital source of short-term funding for daily operations at many companies, but its issuance largely ground to a halt as a crisis that began in risky
mortgages led to a broader credit crunch.

Credit troubles took their toll onBank of America, the second-largest U.S. bank, which on Thursday reported a 32 percent drop in third-quarter profit. The bank's credit default swaps widened by about 9 or 10 basis points after the results, an investor said.

Even consumer product companies are showing the signs of credit market strains.

Hershey said on Thursday its sales fell in the latest quarter in part because the sellers of its candy bars and other products significantly reduced inventories because of "tighter credit conditions for these distributors", among other factors.

In the U.K., Deloitte, receivers of Cheyne Finance, said Thursday the structured investment vehicle (SIV) would no longer pay short term debt as talks to sell its assets with four investment banks reach final stages.

Deals Derailed

More constrained global lending conditions also derailed a bid for a consumer electronics maker's subsidiary this week.

Sanyo Electric has given up on the sale of its microchip unit after private equity firm Advantage Partners LLP failed to gather enough funds to support its bid of about
$1.1 billion, financial sources said Wednesday.

But there were some signs of stabilization in markets on Thursday. Commercial paper outside of asset-backed debt showed expansion. Non-financial commercial paper showed its biggest
increase in eight weeks.

London interbank offered rates, a widely used benchmark for short term global lending, eased. Libor for three-month euros fixed lower, while sterling rates fell for the first time in ten sessions.

Conditions in the U.S. overnight money market appeared to be calming. Federal funds last traded in the market at 4.69 percent, fairly close to the Fed's target rate of 4.75

The U.S. Federal Reserve continued to pump the system with liquidity, injecting $28.25 billion in three repurchase operations.