Commercial Paper Outstanding Falls by Most Since September 2001

By Darrell Hassler

Aug. 16 (Bloomberg) -- The amount of U.S. commercial paper outstanding had its biggest weekly drop since the 2001 terrorist attacks as investors cut off the financing of some mortgages.

The amount dropped $91.1 billion, or 4.1 percent, to a seasonally adjusted $2.13 trillion as of yesterday from Aug. 8, according to the Federal Reserve. It's the biggest decline since the week ended Sept. 12, 2001, the day after the attacks in New York and Washington.

The decline was driven by a 4.3 percent fall in asset- backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of subprime mortgages.

The fall is ``validating the idea that issuers are being forced to make orderly exists from the commercial paper market and obtain financing elsewhere,'' New York-based Miller Tabak & Co. Chief Bond Market Strategist Tony Crescenzi said in an e- mailed note today.

Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, had to borrow the entire $11.5 billion available in a bank credit line after its short- term financing options dried up.

Coventree Inc., Canada's biggest non-bank issuer of asset- backed commercial paper, is seeking C$790 million ($729 million) in emergency funds as its commercial paper programs are stalled because of subprime-mortgage holdings. The Toronto-based company said today that it was unable to sell notes yesterday.

Asset-Backed Paper

The yield on 30-day asset-backed commercial paper with an A1 credit rating, the second highest short-term rating by Standard & Poor's, has risen since Aug. 3 by 0.43 percentage point to 5.75 percent, the highest in six years.

The amount outstanding reached a record $2.22 trillion on July 25, driven by the increasing amounts of asset-backed paper.

Commercial paper, which has maximum maturity of 270 days, is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans.

The loss of short-term funding through commercial paper and similar programs may result in the liquidation of $38 billion to $43 billion of securities backed mainly by mortgages, according to an Aug. 9 report by Bear Stearns Cos. analyst Gyan Sinha.