U.S. Non-Financial Commercial Paper Poised to Increase
The demand for commercial and industrial loans has measurably grown as demonstrated by domestic banks reporting an increase in the number of potential borrower inquires,1 with the Fed noting increased customer investment in plant and equipment, and increased customer needs to finance accounts receivables and inventories. Until recently, corporations’ working capital had been increasingly financed by internally generated funds (Chart 2). In the commercial paper market, supply side conditions are favorable with the ‘AA’ commercial paper discount rate hovering near a low of 1.00%, tightened discount rate spreads (Chart 3), and improved credit quality. If the economic recovery continues, coinciding with a rise in inventory levels and capacity utilization, companies are likely to seek additional funding from the commercial paper market.
The increasing demand for external funds halted the three-year decline in commercial and industrial loans, now holding three months near US$900 billion (Chart 4). The decline from a record peak of US$1100 billion in commercial & industrial loans reached in February 2001 returns the outstanding amount to a mid-1998 level. The retraction from the historic high in commercial & industrial loans stemmed from a decline in capital expenditures in 2001 reducing the need for short-term financing. Corporations’ need to repair balance sheets during 2001-2003 was accomplished partially by holding back capital expenditures while internally generated funds climbed. The ratio of U.S. internal funds to capital expenditures rose to the current 110% from a trough of 68% in 2000. Over the past 20 and 30 years, this ratio averaged 90%. The improved balance sheets helped create a more amenable borrowing environment.
The U.S. commercial paper programs’ downgrade ratio-rating action downgrade to total rating actions-improved to 75.0% in 2004 from the peak of 92.2% hit in 2002 (Chart 5). The increase in credit quality also reflected declining U.S. commercial paper discount rates and spreads-U.S. commercial paper ‘AA’ nonfinancial, 30-day yield and spread are currently 1.00% and 10 basis points, respectively, down from 6.59% and 37 basis points, respectively, ending June 2000. There have been six downgrades of U.S. nonfinancial commercial paper programs in 2004. Fourteen programs are currently on CreditWatch with negative implications with a concentration in the telecommunications sector (Tables 1 & 2).
