Mac Chronicles ...
COMMERCIAL PAPER
How about Commercial Paper? Has the market settled down and reverted to “normal?” It depends on what “normal” is. It appears at this stage that debt has been priced too cheaply for too long, and that the repricing is here to stay for a while. The buyers strike appears to be continuing.
From Marketwatch:
Outstanding commercial paper in the U.S. financial system dropped sharply for a third straight week, indicating that a severe credit crunch has not eased in the market that supplies most large companies with operating funds.
Outstanding paper fell by $62.8 billion, or 3.1%, in the week ending Wednesday to $1.98 trillion, bringing the total decline in the past three weeks to $244 billion, or 11%, the Federal Reserve reported Wednesday.
An estimated $1 trillion in commercial paper will mature in the next few months. ...
...
The declines in outstanding paper have been felt strongest in the asset-backed portion of the market, which represents about half of all commercial paper. These securities are backed by assets such as credit-card receivables or mortgages. In the latest week, asset-backed paper fell by $59.4 billion, or 5.6%. In the past three weeks, this kind of paper has fallen by $184.9 billion, or 15.6%.
And the cost of borrowing has not dropped in past couple of weeks in spite of drops in US Treasury rates. Commercial Paper is very expensive, at least on a relative basis:
More credit ratings:
Upon checking Bloomberg, the number of ratings changes on Mortgage Backed Securities for the month of August has been tremendous. There have been 4,548 ratings changes to the downside, either of a downgrade or the announcement of a review for a potential downgrade. (there is some double counting here as the review and the downgrade may have both happened during the month – Bloomberg doesn’t allow me to segregate the two). 15 issues have been downgraded to “D,” which means they are in default at the moment and 215 issues have been downgraded to single “C,” the lowest rating allowed before going into default. In addition, 282 issues have downgraded or are under review to be downgraded from a previous rating of “AAA.” In fact, I have noticed two issues were downgraded from AAA to D in just one day. These were the issues from the Cairn SIV (structured investment vehicle), which Barclay’s had to bail out on Friday with US$1.6 Billion as Cairn was unable to roll over its commercial paper even though Cairn claims that the assets in its portfolio are AAA and do not consist of subprime debt. This is most likely why Barclay’s is rumored to have gone to the Bank of England window to borrow money at a reported interest rate of 7.5%.
As an aside, a well-informed friend told me that numerous banks have been tapping the Fed Discount window unreported. At the moment, the Fed only releases those that have borrowed on Wednesdays of each week. So many banks are rumored to be borrowing intra-week, borrowing on Thursday and paying back on Tuesday so that they are not named as borrowing from the Fed. Supposedly, intra-week borrowings have actually been quite large.
There are two points I’d like to make about the severe downgrades. One – many people are assuring us that “we don’t own subprime paper, most of or all of our paper is rated AA or AAA.” As the Cairn default show us, that doesn’t mean anything anymore, as the rating agencies models appear to be completely flawed and that they are way behind the curve in analyzing this paper. Two – many funds, especially the SIV’s hold this “high rated” paper in funds that have 10 times leverage because they own such “high quality” paper. But when that paper is downgraded that dramatically, they HAVE to deleverage, and that means that they have to sell at whatever price. In addition, this paper is financed for the most part by short-term asset backed commercial paper (ABCP’s) as Cairn was doing. It is this market that has almost entirely dried up as no one is now ready to finance a fund whose assets may be worth much less than advertised. So as this paper is not rolled over, the SIV’s are basically going to be forced to default. That is why the credit problem is not going away and why there is much more damage to be done. This is the crux of the reason why I do not understand why the equity markets are so sanguine about the issues out there.
... continued |
