Cost of debt in short term to increase

Cost of debt in short term to increase
By Francesco Guerrera and Victoria Kim in New York
Copyright The Financial Times Limited 2007
Published: August 20 2007 03:00 | Last updated: August 20 2007 03:00


Hundreds of US companies are facing sharply higher costs on the short-term debt used to fund their day-to-day operations, in the latest sign that the credit market turmoil is beginning to hit corporate America.

Executives and Wall Street analysts say a recent credit squeeze could force several companies to reduce their exposure to the $200bn (€148bn, £100bn) corporate market for commercial paper, which has trad-itionally been one of the safest sources of corporate funding.

The problems in thecommercial paper market, which is open only to investment-grade companies, will reopen fears that the current liquidity crunch is spreading from the housing market and the financial sector to other parts of the US economy.

A wide range of companies, including Walt Disney, the entertainment group, ITT, the industrial conglomerate, Heinz, the food company, and Motorola, the telecommunications group, have multi-million-dollar commercial paper borrowings, according to regulatory filings.

The companies declined to comment.

Investors' concerns over commercial paper have been growing over the past few weeks as a number of Canadian lenders and a unit of Kohlberg Kravis Roberts, the private equity group, repor-ted problems with these instruments.

Last week's decision by Countrywide, the largest mortgage lender in the US, to use an $11.5bn emergency credit line to shore up its short-term finances, compounded investors' reluctance to buy commercial paper.

The buyers' strike has hit the riskier commercial paper - that issued by companies with lower credit ratings - and whose yields have jumped more than 10 per cent in a month.

According to the US Federal Reserve, these companies now have to pay an average interest rate of 5.9 per cent on their floating rate, 30-day commercial paper compared with 5.36 last month.

"Liquidity concerns re-main the paramount issue for investors amid current volatile market conditions," Lehman Brothers credit strategists wrote in a note to analysts last week.

The rising cost of short-term funding will affecta significant portion ofthe 1,700-plus US companies that rely on these instruments to finance routine operations such as purchasing inventory and paying suppliers.

Analysts said that, although most companies would not see their funding sources completely cut off, they might be forced to move to longer-dated bonds or use the cash on their balance sheets to fund day-to-day activities.

"We expect a number of companies to be more prudent and reduce their reliance on commercial paper," said Mark Oline, co-head of the corporate finance group at Fitch Ratings.

However, the current rise in yields has so far spared the higher end of the commercial paper market.

In particular, some of the largest commercial paper issuers, such as General Electric, IBM and AT&T, have higher credit ratings, and yields on their paper have remained stable.