The market for U.S. corporate borrowing via commercial paper contracted by the most in 19 months, led by a plunge in the amount of issuance from non-financial companies, amid signs economic growth is slowing.
The seasonally adjusted amount of U.S. commercial paper slid $35.8 billion to $972.5 billion outstanding in the week ended Wednesday, the Federal Reserve said yesterday on its website. It’s the biggest drop since a $44.3 billion contraction for the period ended Dec. 1, 2010, and the lowest level since $966.4 billion for the week ended May 9, according to Fed data compiled by Bloomberg.
Industrial firms may have chosen to reduce their reliance on short-term funding for reporting purposes at the close of the second quarter, according to Anthony Carfang, a partner at Treasury Strategies. Investors in the commercial paper market are concerned that Europe’s debt crisis may spread, degrading corporate creditworthiness worldwide. The European Central Bank cut interest rates to a record low today and said it won’t pay anything on overnight deposits as fiscal upheaval threatens to drive the euro region into recession.
“A company reaching quarter end may be interested in showing less cash on its balance sheet,” said Carfang of Chicago-based Treasury Strategies, a firm that advises corporate treasurers. “They could achieve that by deferring their commercial-paper issuance to after the end of the quarter.”
The non-financial commercial paper segment also contracted at the close of 2011 and at the end of the first quarter.
“Showing a dependence on short-term funding whether in the repo market or in the commercial-paper market will signal investors you would be vulnerable to a loss of that funding or a higher rate on that funding,” Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail.
A repurchase, or repo, agreement typically involves the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan.
“If a non-financial corporation can fund operations out of its own Treasury for the end-of-quarter reporting and show lower reliance on external funding, it may want to do so,” he said.
Commercial paper sold by non-financial companies fell $28.8 billion to $176.8 billion outstanding in the biggest drop since a $44.3 billion contraction in the period ended June 24, 2009. In the week ended Jan. 4, this category dropped $25.8 billion, Fed data compiled by Bloomberg show.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.