By Bryan Keogh
October 2, 2008
SourceOct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.
The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve.
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
``The credit window is closed,'' Jim Press, president of Chrysler LLC, the third-largest U.S. automaker, said today at the Paris Motor Show. The financial rescue plan must be approved because ``it's important for us to restore credibility in our banking system.''
The U.S. Senate passed the Bush administration's $700 billion bank-rescue package yesterday with inducements for the House of Representatives to approve the measure after an earlier version was rejected. The legislation, approved on a 74-25 vote, authorizes the government to buy troubled assets from banks rocked by record home foreclosures.
`Effectively Shut'
``It's going to get much, much worse,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''
Commercial banks and bond dealers borrowed $348.2 billion from the Fed as of yesterday, an increase of 60 percent from the prior week amid the worsening credit freeze.
Companies with few or no ties to subprime home debt, such as Caterpillar Inc. and General Electric Co., are having less trouble selling commercial paper, which typically matures in 270 days or less and is used to help pay for day-to-day expenses such as payroll and rent.
Massachusetts canceled a sale of commercial paper this week, dipping into budget reserves to finance ongoing commitments, according to Treasurer Timothy Cahill.
Stocks Fall
Stocks dropped for a second day as reports showed a worsening economy, and Treasury yields fell as traders speculated central banks will have to cut interest rates to prevent a global recession. The Standard & Poor's 500 Index slid 46.78, or 4 percent, to 1,114.28. The yield on two-year notes tumbled 19 basis points, or 0.19 percentage point, to 1.62 percent, according to BGCantor Market Data.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 26 basis points to 3.6 percentage points, the highest since Bloomberg began compiling the data in 1984.
Rates on three-month Treasury bills fell 20 basis points to 0.6 percent. The bills touched 0.02 percent on Sept. 17, the lowest since the 1940s, as the bankruptcy of Lehman Brothers Holdings Inc. sparked a run on the safest securities.
Interbank Rates
Interbank rates have soared as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Governments in Europe and the U.S. rescued six financial institutions in the past week. Three-month Libor rose 6 basis points to 4.21 percent.
The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was 197 basis points a week ago and 79 basis points a month ago.
Libor for euros advanced 3 basis points to a record 5.32 percent. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.
``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.''
The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low.
`Urgency for Fixes'
The market dropped for a third straight week, losing a total of $208 billion, as money-market funds faced withdrawals from investors, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.
``The purge is broad and is impacting issuers with far more predictable cash flows -- regular run-of-the-mill companies in need of working capital,'' Crescenzi wrote today in a note to clients. ``The declines add to the urgency for fixes to the credit crisis and bolster the case for a Fed rate cut.''
The U.S. market for short-term debt backed by assets including mortgages and car loans fell $29.1 billion, or 3.9 percent, this week to a seasonally adjusted $724.7 billion, according to the Fed.
Caterpillar, GE
While banks, brokers and insurers have struggled to issue commercial paper, other companies such as Caterpillar and Fairfield, Connecticut-based GE have had less trouble.
``In recent weeks, Caterpillar has continued to access the commercial paper markets as part of its normal business practices,'' company spokesman Jim Dugan said in a statement.
The market for non-financial issuers of the debt was little changed this week at $199.1 billion after rising to an almost seven-year high last week of $217.2 billion, the Fed data show.
GE borrowed overnight commercial paper today at a range of 0.25 percent to 0.75 percent, ``well below'' Libor, according to the company.
``Our CP funding continues to go smoothly,'' spokesman Russell Wilkerson said. `` We have overfunded every day for the past several weeks, including today, with good demand for our paper. We are seeing maturities extend at terms ranging from weeks to up to six months.''
Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of money into the banking system. The European Central Bank today offered $50 billion of overnight funds at a marginal rate of 2.75 percent. The Swiss National Bank awarded $9 billion. The Bank of England sold $8.9 billion.
Rate Cut
Futures traders put the odds that the Fed will cut the target interest rate at least 50 basis points later this month at 98 percent, compared with none a week ago. The target rate is currently 2 percent.
Leveraged loan prices tumbled 8.57 cents in September to a record low of 79.8 cents on the dollar. Price declines will make it harder for junk-rated companies to borrow as investors may opt to buy existing debt at distressed levels and as capital- constrained banks restrict lending.
Corporate bonds with the highest AAA ratings lost 6.5 percent in September, the most since at least 1989, according to Merrill Lynch & Co.'s U.S. Corporates, AAA Rated index.
To contact the reporter on this story: Bryan Keogh in New York at
bkeogh4@bloomberg.netLast Updated: October 2, 2008 17:37 EDT