The premiums of short-term commercial paper (CP) yields over risk-free rates surged this week to levels that corporate treasurers haven’t seen since the 2008 financial crisis. Some of the largest and best-known U.S. companies were reported to be drawing down lines of credit in response to the stress in the CP market. The Federal Reserve responded quickly, creating a Commercial Paper Funding Facility (CPFF) with the goal of supporting the ongoing flow of credit to consumers and businesses.
However, a new report from Fitch Ratings indicates that investment-grade U.S. businesses continue to have access to the liquidity they need. The report recognizes that the cost of funding in the CP market has spiked, and that some companies are drawing on revolvers to repay their maturing CP. “We acknowledge companies will be trading into slightly more expensive but longer-tenored debt,” Fitch says.
However, Fitch doesn’t see this as a sign of a larger cash crunch. “From a purely corporate-credit perspective, using a revolver to fund maturing CP is a sign of a dislocated market—but not necessarily indicative of a corporate liquidity issue,” Fitch says. “Most investment-grade companies have sufficient cash, committed revolver capacity, and are FCF [free cash flow] positive.”
In fact, according to the report, only a small proportion of investment-grade companies’ long-term debt will mature in the near future. “Approximately $195 billion, or 5 percent, of the $4 trillion investment-grade corporate bond universe is due this year, and $287 billion (or 7 percent) is due in 2021.”
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Fitch says that despite price volatility, the CP market is functioning as expected, given current conditions in and prospects for the global economy. The report projects that investment-grade companies will respond not only by drawing on established credit facilities, but also using accounts receivable (A/R) securitization or factoring, which might prove to be more cost-effective.
“Risks could emerge for entities that draw down a revolver with a near-term maturity and are unable to extend the revolver or access the longer-term capital markets,” Fitch reports. “While there are no obvious candidates for this scenario in our portfolio [of rated investment-grade businesses], we expect these entities to be Tier 2 and Tier 3 issuers that appear to be ineligible for the CPFF. By definition, these lower-rated entities typically have lower financial flexibility, and a material reduction in liquidity would also be reflected in the long-term rating.”
For top-rated corporates, Fitch concludes, “the potentially increased costs associated with rolling CP at higher rates, drawing on revolvers at higher rates, or terming out this portion of … capital structures is not expected to materially affect interest coverage or credit ratings. For most companies, this activity will represent an expected shift in liquidity management.”