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| Friday, November 20, 2009 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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September 28, 2008 12:01 AM ET
Corporate borrowers are paying significantly more for debt than they were prior to Labor Day, according to a survey of corporate finance executives conducted by Financial Week. Borrowing costs for half of the respondents to the online survey had increased anywhere from 100 basis points to 500 basis points since Sept. 1, with the other half reporting increases of up to 99 basis points since the 15-month-old credit crunch degenerated this month into a global credit crisis. Almost 60% of 700 respondents said they have been talking more frequently with their lenders since corporate credit conditions tightened after Labor Day. Nearly half said they’ve been in more frequent contact with their corporate insurance brokers and underwriters in the wake of the Sept. 22 federal bailout of insurance giant American International Group. And a third said they’ve done the same with customers, vendors and suppliers to more closely monitor their ability to provide or pay for goods or services. More than two-thirds reported investigating the holdings of their company’s money-market funds in recent weeks, and nearly 40% said they had transferred cash this month into what they deem the safest of instruments, including Treasuries and Treasury-only funds. The deepening credit crisis promises to further crimp already constrained corporate dealmaking. Funeral services company Service Corp. International, for example, has a bid outstanding to acquire competitor Stewart Enterprises and expects to finance the acquisition with debt, leaving CEO Thomas Ryan to hope the credit markets settle down by the time the deal comes to fruition. “Today it would be pretty difficult for anyone to try to finance anything through the capital markets,” Mr. Ryan said. The tightening of corporate credit intensified last week as Congress debated the merits of the Bush administration’s $700 billion plan to bail out the nation’s banks. The cost of lower-rated 30-day commercial paper soared to a record high last Wednesday, according to the Federal Reserve. The Fed’s commercial paper survey showed spreads on A2/P2 paper widening to 409 basis points, from 288 basis points the previous Friday. Not long after the credit crisis began in mid-2007, the spread between the two grades of paper spiked to 160 basis points. Now, it’s more than double that level. Not surprising-ly, the spike in short-term costs has been accompanied by a plunge in borrowing. Total U.S. commercial paper outstanding slumped $61 billion, or 3.5%, to a seasonally ad-justed $1.7 trillion for the week ended Sept. 24. On a non-seasonally adjusted basis, outstanding commercial paper dropped $44 billion, to $1.64 trillion. Though rates on AA 30-day paper fell to 190 basis points last Wednesday from 240 the previous Friday, some of the most highly rated and biggest issuers of commercial paper—the financing arms of equipment makers such as Caterpillar, Deere and General Electric—were growing warier of the market. Caterpillar and Deere said they may cut their reliance on commercial paper after General Electric moved in that direction. “The commercial paper market is experiencing more dislocation than we have ever seen,” said Jim Turner, head of debt capital markets at BNP Paribas in New York. “Some very creditworthy is-suers are only able to issue overnight rather than the more typical 30 days or longer, and if you’re a corporate treasurer, that situation probably makes it hard to sleep.” To reduce the leverage of GE finance subsidiary GE Capital by roughly 10%, its parent said last Thursday it would reduce the dividend it demands from GE Capital from 40% of its earnings to 10% and suspend the current GE stock buyback. GE Capital will also extend maturities on its debt by cutting issuance of commercial paper to around 10% to 15% of GE Capital’s total debt. The company insisted that GE Capital has sufficient liquidity and no need to raise additional debt in 2008. But GE’s stock has suffered recently because of the company’s exposure to the credit markets. The rise in commercial paper costs reflects a growing lack of confidence in short-term credit markets, as investors pulled a record amount of cash—$182 billion—out of money-market funds in the two weeks ended Sept. 24, after the first shareholder losses in 14 years. Money funds are the biggest buyers of commercial paper, which typically helps companies cover day-to-day expenses such as payroll and rent. Some companies are already scrambling. Goodyear Tire & Rubber said it plans to draw $600 million from its U.S. revolving credit facility due to what it termed “a temporary delay” in its ability to access $360 million in cash currently invested with the Reserve Primary Fund. The Reserve Primary Fund, a troubled money-market fund, has delayed the payment of requested redemptions pursuant to an SEC order allowing an orderly disposition of its securities. Goodyear said the SEC’s action was the catalyst for the company’s decision to borrow against the credit facility. Goodyear said its other U.S. cash investments remain fully accessible by the company. The company said it will use the money it’s borrowing to support what it calls “seasonal working capital needs” and to enhance its cash liquidity position. Goodyear may not be alone, judging by the fact that 61% of respondents to the Financial Week survey said they had looked deeper into the holdings of their money funds in recent weeks. “If you can’t [issue commercial paper], we have some serious problems,” said Jerry R. Marlatt, a partner in the financial products group of Clifford Chance in New York, who works with issuers of asset-backed commercial paper. “We’re at a key intersection here in terms of confidence.” —Financial Week sister publication Crain’s Cleveland Business contributed to this report.
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