This content is from: Portfolio

Happier days?

After the worst decline in 40 years, nonfinancial commerical paper issuance has picked up this year. That's good news for the economy.

Commercial paper may never be able to compete with sexier corporate finance cousins like M&A and IPOs for the attention of the press or the ambitions of newly manufactured MBAs. But the $1.5 trillion short-term debt market remains the lifeblood of corporate America, providing companies with the capital they need to fund day-to-day operations. It has also long been a bellwether of the health of the business sector, and after an extended bad spell, the lifeblood is beginning to flow again.

Nonfinancial commercial paper outstanding is up 17.3 percent, to $122.2 billion, since the end of last year, according to Standard & Poor's (see chart). Companies tap the market, which offers maturities of 30 to 180 days, to finance everything from inventory and accounts receivable to mergers and acquisitions.

This year's nascent rebound follows what analysts describe as the worst short-term credit crunch in four decades. As recently as November 2000, there was an all-time high of $351.3 billion in nonfinancial commercial paper outstanding. But a wave of bankruptcies and liquidity crises at formerly highly rated companies followed, prompting widespread ratings downgrades that shut many companies out of the market. Others had no interest in short-term borrowing during the downturn, with business investment and capital spending on hold. And with long-term interest rates at lows not seen since John F. Kennedy was president, companies that did need funding took advantage of favorable terms in the bond market. By last December nonfinancial commercial paper outstanding had plunged 70 percent from the 2000 peak, to $105 billion.

"The slump was unprecedented," says Marc Fisher, who's in charge of global short-term credit trading at Morgan Stanley. "It was the result of a perfect storm."

But the worst now appears to be over. As corporate investment, capital spending and merger activity are rebounding, so too is the short-term-financing market. In February, FedEx Corp. issued $2 billion in commercial paper to finance its $2.4 billion cash acquisition of copy giant Kinko's. It was the first time FedEx -- a tier-two credit -- had taken such a big leap into this market, says Charles Buchas, the company's treasurer.

"The pricing is extremely attractive right now," says Buchas. "They're practically giving it away." FedEx paid a floating rate of 1.1 to 1.5 percent on its paper. Proceeds were used to pay off a bridge loan from several banks, and the company intends to issue longer-term bonds to pay off the commercial paper.

FedEx isn't alone. Publishing titan R.R. Donnelley & Sons Co. raised $1 billion last month to help fund its $3.2 billion acquisition of Moore Wallace. Deals such as these have analysts and bankers predicting that the current rebound is only the beginning of a long-term expansion.

"We feel we are at a turning point," says Diane Vazza, who is in charge of global fixed-income research at Standard & Poor's. "Supply conditions are excellent, and nonfinancial CP is poised to be on an upswing."

And that is a very good sign for the economy. "We do feel the commercial paper market has bottomed out as companies are starting to invest more in their core businesses," says John Willian, who heads global money markets for Goldman, Sachs & Co. "We use this as a signal of the general health of our corporate clients and their willingness to move forward, and increased capital spending ultimately leads to a stronger economy."

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