Commercial paper Exodus boosts bond issuance

Global Finance, May 2002 by Platt, Gordon

As pressure increases on corporations to reduce their reliance on short-term financing, the bond market appears to be taking up much of the slack. While commercial paper sold in the US market in March fell by a record $33.3 billion, investment-grade corporate bonds issued in the same month hit an all-time high of $88 billion.

With the credit-rating agencies paying more attention to liquidity, some issuers have been reluctant to rely too heavily on short-- term debt. Consequently, big pay-downs of commercial paper have been a major source of the higher-- than-expected issuance of corporate bonds so far this year, analysts say. "Corporations need to defend themselves against the possibility of downgrades," says Dennis Adler, corporate bond strategist at Citigroup's Salomon Smith Barney in New York.

"Companies want to spread their financing throughout a range of maturities," he says. However, there is an economic cost to "terming out" commercial paper in the bond market, particularly with the steeper yield curve, Adler says.

Commercial paper is one of the cheapest forms of short-term debt financing. Companies that choose to lock in current rates by extending debt maturities will pay a cost now, according to Adler. "They have to be right about rates going up later," he says. "Going from a 2% interest rate in the paper market to a 6% rate in bonds is costly."

Commercial paper issuance by non-financial corporations has fallen by 46% in the past 15 months. Automobile manufacturers paid down huge amounts of paper in the past year because they were downgraded, Adler says. "It seems that the high-grade corporate market continues to be a `lender of last resort' for the accumulated excess debt for the prior business cycle, whether it be from the shrinking CP market, the bank loan market, or acquisitions of formerly non-investment-grade companies," he adds.

Moves by the Federal Reserve to leave short-term rates on hold have left a window open for companies that want to refinance and extend debt maturity, says Diane Vazza, managing director of global fixed-- income research at Standard & Poor's in New York. "A heightened awareness among issuers and investors of matching assets and liabilities, combined with `rollover risk,' is prompting some issuers to turn away from the commercial paper market toward the bond market," she says.

Later this year, however, as the US economy recovers and interest rates begin to move higher, analysts say issuers are more likely to move to the short-term markets for financing. Meanwhile, a growing share of CP is being secured by assets.