Standard & Poor’s announced the launch of a U.S. commercial paper index, a new measure designed to provide a benchmark and more transparency for the U.S. commercial paper market.
The index, the first of its kind to be offered by a major index provider, comes as companies have been scaling back their use of the commercial paper market, fearing they won’t be able to raise cash for everyday activities like buying inventory or paying staff if the fragile market falls apart.
The market all but shut down two weeks ago when Lehman Brothers Holdings Inc. (LEH) filed for bankruptcy. Funds starting hoarding cash for fear of redemptions from investors. Since that time, the interest rates on lower-rated commercial paper have widened when compared with higher-rated CP, and buyers have become stingy.
James Rieger, S&P’s vice president of fixed-income indicies, called commercial paper “a critical component of the capital markets and a widely held investment among money market funds and other short term investors seeking higher yields and greater diversification than treasury bills.”
S&P said its commercial paper index — with 1,205 constituents from more than 190 issuers, with 77% of them financial and 23% non-financial — includes commercial paper with one-to-three month maturities from corporate issuers. Issuers must have a commercial paper program of at least $2 billion, and asset-backed commercial paper issues are excluded from the index.
Companies usually sell commercial paper with maturities from seven to 90 days, to raise money for daily operations. But the market has been shrinking for more than a year. Lately, with so few buyers around, many borrowers have only been able to sell overnight financing at higher interest rates.
Companies overall were forced to reduce their borrowings on the short-term commercial paper market by $212 billion between the end of February and last Wednesday, as investors continued to back away from the corporate IOUs.
A dysfunctional commercial paper market has potentially dire consequences for companies that rely on the debt to manage short-term expenses like payrolls and rent. If they can’t raise cash at decent rates, they’re more likely to tap bank credit lines instead. But a spike in such demands may also put a strain on these banks’ capital.
Many of the biggest issuers of commercial paper are large U.S. companies with direct exposure to the flailing financial services industry, or the beleaguered consumer.
