Banks report rise in demand for CP

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Although market and economic factors have decimated US non-financial commercial paper (CP) levels, some analysts believe a turnaround is already in progress, citing an increased need for the funding resource at the corporate level.

Non-financial CP peaked in November 2000, when issuance reached $351.3 billion, according to Federal Reserve data. As of December 2003, that figure had fallen by 70% to just $105 billion. Total CP levels also peaked in November 2000 at $1.627 trillion, falling to $1.265 trillion last December.

But more recently demand has increased for commercial and industrial loans, which has caused the erosion of non-financial CP to abate, according to a recent report from Standard & Poor’s.

“Already, the demand for commercial and industrial loans has measurably grown, as demonstrated by domestic banks reporting an increase in the number of potential borrower enquiries, with the Fed noting increased customer investment in plant and equipment, and increased customer needs to finance accounts receivables and inventories,” says the S&P release.

The report goes on to say, “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.”

In terms of issuing commercial paper, conditions could not be more favorable. As of mid-March, the 90-day AA non-financial commercial paper discount rate was at 1.00%, according to Federal Reserve data. In comparison, that rate was flirting with 6.60% in June 2000, which currently makes funding with short-term paper appear all the more favorable.

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