In normal markets commercial paper is very safe. The very short term business borrowing is made possible by money market funds and provides businesses with short term financing at low rates and provides investors some return for short term cash holdings. But the recent credit crisis does not a normal market make. Companies that depended on the commercial paper market now are thinking about the risks of such dependence.
Coca-Cola Flees Commercial Paper for Safety in Bonds
Coca-Cola, health-insurer WellPoint Inc. and more than 30 other companies are issuing bonds and using the proceeds to repay their short-term IOUs, according to data compiled by Bloomberg. The amount of commercial paper outstanding shrank 16 percent since Jan. 7 to $1.48 trillion last week and daily issuance dropped to a four-year low, according to the Federal Reserve.
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By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest
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By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest
Related: Where to Keep Your Emergency Funds?
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