Concern grows over squeeze on corporate funding
news.ft.com
By Gary Silverman, Joshua Chaffin, Jenny Wiggins, Richard Waters and Vincent Boland in New York
Published: February 14 2002 16:06 | Last Updated: February 15 2002 23:24
Growing concern about access to short-term capital sent
tremors through Wall Street on Friday amid signs that
more companies are about to be frozen out of the
commercial paper market, the main source of day-to-day
corporate funding.
Investors dumped stocks of telecommunications
companies after Qwest Communications was forced this
week to turn to its banks for $4bn after it was squeezed out
of the commercial paper market. It had failed to find buyers
for an issue of new short-term funding.
Concern that others will suffer the same fate rose after JP Morgan Chase said
Sprint, another US carrier, was "overextended" in the commercial paper market.
Given the problems encountered by Qwest, "certainly there is a reasonable chance
that Sprint will have to look elsewhere for financing", the bank said in a research
note.
A Sprint spokesman said the company had not met any funding problems. "We're
finding liquidity and placing our paper," he said.
Sprint had $3bn of commercial paper outstanding at the end of last year. Earlier this
month it said it would need to raise an extra $1.7bn to meet its funding needs this
year, although Wall Street analysts expect it to need $2bn or more. The collapse of
Enron has exacerbated fears of investors in the commercial paper market, making
them wary of issuers with any hint of earnings or accounting problems.
Analysts said competitors of Enron, the bankrupt energy trading group, could also
encounter problems raising short-term capital. Carol Levenson, director of research
at Gimme Credit, pointed to the energy companies Williams, Mirant and El Paso.
Ms Levenson also identified Toys "R" Us, the toy retailing giant, which is cutting jobs
and closing underperforming stores.
The degree of nervousness among investors about buying newly issued short-term
paper from issuers at the low end of the ratings scale can be gauged from the sharp
contraction in the size of the market. According to the Federal Reserve, the amount
of non-financial commercial paper outstanding fell this week to $209bn, 40 per cent
below the levels of November 2000.
The latest reverberations in the commercial paper market were triggered last week
when Tyco International was forced to draw down $14.5bn of bank funding to repay
all its commercial paper debt outstanding.
Joseph Nacchio, Qwest chief executive, blamed heightened investor nervousness
for the company's liquidity problems. He said Qwest would hold a weekly conference
call with investors to answer any questions about the company and to clear up "all
rumours" in the market.
The impact of the squeeze in the commercial paper market has been greatest in the
bottom end of the market, among companies with short-term ratings of A2/P2. The
spreads between rates on individual issues has widened to between 50 and 75 basis
points, up from 15 to 25 basis points, traders said on Friday.
More highly rated companies were not affected. "It's definitely sector-related. The
telecoms sector is having a hard time," said Robert Porter, an analyst at Bank of
America. "Other issuers, such as food products companies, are still having good
access."
Traders said volatility would continue as more companies were forced to go to more
expensive sources of capital such as the bond markets or bank loans.
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Its something of a vicious circle. Credit fears close off the commecial paper market to telecom companies, that forces them to use expensive bankloans. The news that they can't sell commercial paper causes more fear that closes off more companies off from the commecial paper market. and the news of that causes more fear that.... |
