View Full Version : Debt Market in `Pivotal' Test as $140 Billion Matures

09-10-2007, 05:46 AM
By John Glover and Neil Unmack
Sept. 10 (Bloomberg) -- Banks and companies need to refinance almost $140 billion of commercial paper in Europe by the end of next week and may push up yield premiums on corporate bonds, according to Deutsche Bank AG, Germany's biggest bank.
``This could be a pivotal seven to 10 days,'' Jim Reid, a credit strategist at Deutsche Bank in London, wrote in a note to investors today. ``This will inevitably lead to wider corporate spreads, especially in high yield.''
Borrowers are paying the highest costs in six years for commercial paper, IOUs maturing in 270 days or less, because of losses from assets related to subprime mortgages, with the yield in the U.S. at 6.33 percent for 30-day debt.
Almost $60 billion of the commercial paper due this week and next is owed by conduits, investment firms set up by banks and companies to invest in longer-term assets, according to Reid. Conduits issue commercial paper backed by bonds including asset-backed securities, as well as car loans, mortgages and trade receivables. The remaining $80 billion is unsecured.
Yield spreads on corporate bonds are rising in part because banks are more focused on keeping their own conduits afloat than providing finance to other companies. The yield premium on European high-risk bonds over similar-maturity government debt has increased to 426 basis points from 358 basis points at the beginning of August, Merrill Lynch & Co. indexes show.
High-yield, high-risk bonds are rated below Baa3 at Moody's Investors Service and BBB- at Standard & Poor's. A basis point is 0.01 percentage point.
`Limited Appetite'
``Banks have a very limited appetite to hold bonds on their balance sheets given other, more pressing demands for their capital in the short term,'' Deutsche Bank's Reid said in a telephone interview today.
HBOS Plc, the U.K.'s largest mortgage lender, was forced on Aug. 21 to commit to refinancing about $35 billion of asset- backed commercial paper sold by its Grampian Funding LLC unit.
The amount of commercial paper coming due in Europe will peak on Sept. 17 when the equivalent of $48 billion matures, according to a report by Bank of America Corp. analysts in London led by Raja Visweswaran. The analysts said they expect credit markets to remain ``unsettled'' until then.
Banks' ``increasingly bloated balance sheets will not be good news for overall market liquidity,'' Deutsche Bank's Reid said in the note.
To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net ; Neil Unmack in London at nunmack@bloomberg.net
Last Updated: September 10, 2007 05:54 EDT