From Staff Reports
Companies in Europe face a situation in which they need to refinance nearly $140 billion worth of commercial by the end of next week, according to Deutsche Bank AG, Germany's biggest bank. This will increase corporate borrowing costs.
According to Bloomberg News, Deutsche Bank Credit Strategist Jim Reid wrote in a research note to investors yesterday (Wednesday) that "this could be a pivotal seven to 10 days. This will inevitably lead to wider corporate spreads, especially in high yield."
Borrowers are paying the most in six years on commercial paper – essentially corporate IOUs that mature in 270 days or less. The market for so-called "conduits" created by banks that use short-term debt to buy long-term assets – worth an estimated $1.2 trillion – is "seizing up" because of the global credit crisis, according to Bloomberg. Conduits are the entities that have prompted banks in Europe to require bailouts due to their investments in the ailing subprime-mortgage crisis.
Yields on 30-day U.S. commercial paper have rocketed to more than 6.3% this week from roughly 5.5% on Aug. 9. The benchmark London Interbank Offered Rate (LIBOR) for one month, based in euros, is at 4.45%, and closed at a six-year high of 4.5% last week, Bloomberg said.
Deutsche Bank's Reid wrote that nearly $60 billion of the commercial paper due this week and next is owed by the conduit units. The debt is backed by bonds, such as asset-backed securities, not to mention automobile loans, company receivables, and even mortgages. The remaining $80 billion of the $140 billion total is unsecured debt.
Gertjan Vlieghe, director of European interest-rate strategies with Deutsche Bank's London office, said that "it seems that even the commercial paper that is being refinanced is being rolled into shorter maturities [with the result that] with each week that goes by, the stock of [commercial paper] that needs refinancing is getting bigger."
According to Merrill Lynch, corporate bond spreads are widening significantly. The reason: Banks are focusing on keeping their own conduits funded than in doing the same for other banks. That's why Merrill Lynch's indexes show that the spread on high-risk bonds in Europe (versus government debt of similar duration) has reached 426 basis points now from 358 basis points at the outset of August.
When interest costs rise, corporate profits can get squeezed – unless companies can find cost savings elsewhere. That can lead to such cost-reducing moves as layoffs.
News and Related Story Links:
- Bloomberg News:
Debt Market in Pivotal Test as $140 Billion Matures.