Commercial Paper Slump Extends to Sixth Week(ZT)

U.S. Commercial Paper Slump Extends to Sixth Week (Update4)

By Mark Pittman

Sept.20 (Bloomberg) -- The U.S. commercial paper market shrank for a sixthweek, extending the biggest slump in at least seven years and signalingFederal Reserve interest-rate cuts haven't yet drawn investors back toshort-term debt.

Short-term debt maturing in 270 days or lessfell $48.1 billion in the week ended yesterday to a seasonally adjusted$1.87 trillion, including a $32.1 billion decline in financial firms'commercial paper. Asset-backed debt dropped $15.6 billion, according tothe Fed in Washington.

Commercial paper investments havedeclined $354.5 billion, or almost 16 percent, since the week endedAug. 8, according to the Fed. The slump began in asset-backed paper andspilled into financial companies' short-term debt. Banks and otherfinancial institutions have sold almost $14 billion of bonds and notessince Aug. 24, allowing them to pay off commercial paper.

''Thereare other funding sources that corporations are able to turn to besidescommercial paper,'' said Alex Roever, short- term debt strategist atJPMorgan Chase & Co. in New York. ''That's a healthy sign for theoverall financial system.''

The prospect of a slowing economy,which prompted the Fed to act this week, may have caused firms toreduce sales, said Tony Crescenzi, chief bond market strategist atMiller Tabak & Co. in New York.

'Supply Issue'

''Theeconomy is not very strong,'' Crescenzi said. That reduces the need forbanks and brokerage firms to sell new debt to fund their day-to-dayactivities, he said. ''The demand for money weakens when the economyweakens.''

The slide in financial sales extended a drop of $2.7 billion a week earlier.

TheFed lowered its benchmark federal funds rate to 4.75 percent andreduced its discount rate, which it charges to lend to banks, a secondtime to prevent a housing slump from forcing the economy into recession.

Theinterest-rate cut helped bring down yields on commercial paper. AAfinancial commercial paper 30-day yields fell to 4.72 percentyesterday, down from 5.42 percent on Sept. 5.

Financial issuersare selling longer-term debt and avoiding the risk that commercialpaper won't roll over when it matures, said James Cusser, who managesabout $1.5 billion in fixed-income securities at Waddell & ReedInc. in Shawnee Mission, Kansas.

'Until Clouds Pall'

''Financialcompanies may be willing to forgo all the advantages of commercialpaper as long as the market is stable because they haven't seen aliquidity event like this before,'' Cusser said. The banks andbrokerage may keep paying off commercial paper ''until the cloudspass.''

The buyers' freeze shut out borrowers including mortgagelenders Countrywide Financial Corp. and Thornburg Mortgage Inc. as wellas GMAC LLC and investment company Cheyne Finance Plc.

GMAC, thelender owned by Cerberus Capital Management LP and General MotorsCorp., last week accepted $21.4 billion in financing from CitigroupInc. after being unable to sell commercial paper. Calabasas,California-based Countrywide borrowed its entire $11.5 billion inavailable bank credit lines last month to fund its operations afterbeing unable to roll over its short-term debt.

''It's more of asupply issue than demand,'' said Peter Crane, founder of Crane DataLLC, the Westborough, Massachusetts- based publisher of the Money FundIntelligence Newsletter. ''People would buy it, but issuers don't wantto issue at the price.''

Defaults Rise

Asset-backedcommercial paper sellers use the cash to buy mortgages, bonds, creditcard and trade receivables, as well as car loans. Because some of theprograms are backed by subprime loans, where defaults had reached afive-year high, investors refused to buy the debt.

The view thatpurchasers of asset-backed commercial paper have driven the drop byboycotting the paper completely is a ''myth that needs to bedispelled,'' Maureen Coen, global head of asset-backed commercial paperorigination at Credit Suisse Group, said at conference in New Yorkyesterday.

''We all could have predicted exactly the dollaramount of decline frankly,'' she said, because it was driven by exitsby issuers that were forced due to program rules such as declines inthe values of holdings, or that were voluntary because borrowing costswere higher in the market versus other sources of short- term debt.

Outstandingasset-backed commercial paper has slumped $253.4 billion. The declinesslowed each week from a peak of $77.1 billion in the week ended Aug.22. Sales have declined as investors balked at buying some commercialpaper, shutting out some issuers.

''This means there are still players being escorted from the market,'' Crane said.