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U.S. Commercial Paper at 10-Year Low: Rates of Return (Update3)
By Emma Moody
New York, April 9 (Bloomberg) -- U.S. companies including General Electric Co. and Ford Motor Co. have reduced short-term financing to the lowest level in more than a decade as investors have become wary of companies' reliance on the debt.
Commercial paper, debt that matures in nine months or less, represented an average 10.8 percent of firms' overall borrowing at the end of March, down from 13.9 percent in 2000 and the smallest portion since 1991, said John Lonski, chief economist at Moody's Investors Service.
``There's every indication it will continue to come down,'' Lonski said. ``It's something everybody is trying to stay away from.''
Companies have cut their use of commercial paper as investors and ratings companies have warned them that they are using too much of it to fund operations. Other borrowers such as Qwest Communications International Inc., Tyco International Ltd. and Gap Inc. have been forced out of the market as investors balked at buying the debt.
``Companies were just becoming overly reliant on commercial paper,'' Lonski said. ``The problem is that CP is very short-term and there's a lot more refinancing risk with that.''
GE's finance arm, GE Capital Corp., and Ford's Ford Motor Credit Co. had increased their use of commercial paper over the past decade to take advantage of interest rates as low as 3.79 percent, lower than the roughly 5 percent yield on the 10-year Treasury note used as a benchmark for longer-dated bonds.
Bonds Instead
Instead of commercial paper, companies are selling bonds or debt backed by assets such as cars or payments due from customers. Investment-grade companies rated by Moody's sold $186 billion of bonds in the first quarter, Lonski said, up from $151 billion in the fourth quarter of 2001.
The surge in investment-grade bond sales has been a boon for investment banks. Tyco's finance arm, CIT Group Inc., has sold $2.5 billion of unsecured bonds and $3.2 billion of securities backed by mortgages and other assets to fund itself this year. The finance company, which previously sold commercial paper without using an underwriter, gave business to Credit Suisse First Boston, Salomon Smith Barney, J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc.
Companies typically pay about 50 basis points, or 0.50 of a percentage point, for such transactions. Borrowers that use banks for commercial paper offerings pay one-tenth of that.
$1.6 Trillion
Some companies are selling bonds maturing in as long as 30 years, betting the Federal Reserve will begin to raise interest rates later this year.
Use of commercial paper grew to $1.6 trillion in 2000 as companies took advantage of cheap financing to pay for capital spending, acquisitions and day-to-day financing. Interest rates were also falling, making it more attractive to sell short-term debt. Commercial paper outstanding has since declined to about $1.36 trillion.
As business spending grew 9.2 percent a year between 1992 and 2000, companies' debt loads increased by about 10 percent, Lonski said. At the same time, commercial paper outstanding grew by about 14.4 percent.
Ford's commercial paper was 24 percent of its total debt in 2000. As a top-rated company with a ``P-1'' short-term rating from Moody's and an ``A-1'' from Standard & Poor's, the company found willing buyers for its short-term securities.
The company's ratings were cut to ``P-2'' and ``A-2'' in October, forcing it to look for alternative financing. Money- market investors must have 95 percent of their investments in top- rated commercial paper.
Ford
Ford Motor Credit now has 3.1 percent of its debt, or $6 billion, in commercial paper, said Bibiana Boerio, the company's chief financial officer. ``We've been seeking to shift our mix out of commercial paper,'' Boerio told reporters.
Since 2000, Ford increased its long-term bonds to $135 billion from $111 billion and more than doubled its debt backed by car leases and payments due from customers to $53 billion from $25 billion.
Like many other companies, Ford plans to maintain its commercial paper at these levels and increase its asset-backed debt to help finance its business.
Asset-backed commercial paper sold by U.S. companies rose to $731.4 billion at the end of March, up from $641.8 billion at the end of 2000. In the same time, commercial paper sold by companies rated ``A-2'' and ``P-2'' like Ford, dropped to $84.1 billion from $120.1 billion.
GE Capital, the largest seller of commercial paper with about $100 billion outstanding, committed last month to reduce that to less than 35 percent of its total debt from about 42 percent. GE Capital was publicly rebuked by Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., for relying too heavily on commercial paper.
GE Capital
``It got brought to the front stage this year with the issues at the finance companies'' such as GE Capital, said Steve Kellner, who oversees $45 billion of investment-grade corporate debt at Prudential Investment Management.
GE Capital sold $11 billion of bonds last month and plans to sell as much as $25 billion this quarter.
The company may also seek to reduce commercial paper in Europe, said Duncan Sankey, head of credit research at Nomura International. Bankers say the company may sell as much as 10 billion euros of long-term debt in Europe in coming months.
``That's part of their current plan given investor and rating agency concerns about funding risk,'' Sankey said. ``The market has become very nervous about companies' reliance on commercial paper. Moody's is concerned that companies like GE that have large amounts of commercial paper in their capital structure could face refinancing risk in periods of market disturbance.''
`Too Aggressive'
GE was probably ``a little too aggressive'' in using commercial paper, said Kenneth Hackel, chief U.S. fixed income strategist at Merrill Lynch & Co.
While industrial companies are reducing their dependence on commercial paper, they still need it to help finance their day-to- day operations, Hackel said in a report. That may soon slow the transfer of short-term debt to long-term debt, he said.
``While CP became a popular, albeit inappropriate, method of merger financing in the late '90s, it serves several important'' functions, Hackel said. That ranges from ``funding working capital needs to managing short-term volatility in operating cash flow. Furthermore, it is one of the cheapest and most efficient forms of short-term debt financing.'' |
