Businesses find lending alternatives

A key Fed lending program fell drastically this week, but businesses are finding other ways to borrow money.

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By David Goldman, staff writer

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NEW YORK ( -- Businesses largely moved out of a Federal Reserve lending program this week, signaling a shift in how companies are choosing to borrow money.

The Fed held more than $200 billion in three-month corporate debt known as commercial paper that matured this week. Businesses had the option of refinancing the debt with the central bank, lending the paper in the open market, or choosing to enter another program from the Federal Deposit Insurance Corp.

According to a Fed report released late Thursday, most companies opted for a new direction. The central bank held $248.1 billion in commercial paper, down $102.4 billion, or 29% from last week. In the week before, the Fed held $350.5 billion in its so-called Commercial Paper Funding Facility (CPFF).

"Companies are finding other ways to finance their debt," said Steve Van Order, fixed income strategist at Calvert Funds. "Some are taking advantage of lower interest rates on even shorter-term paper in the open market."

CPFF interest rates are currently at 1.23% for unsecured three-month debt, lower than the 2.14% for equivalent paper on the open market. But shorter-term paper currently has much lower interest rates, from 0.16% for one-day paper to 0.94% for two-month paper.

Despite these lower rates, businesses largely chose not to enter the open commercial paper market. Total commercial paper outstanding fell $98.9 billion to $1.6 trillion this week, the lowest level since the Fed program began three months ago. Financial companies accounted for 95%, or $93.5 billion, of that exodus.

A new FDIC option

The facility began purchasing paper from companies on Oct. 27, after the market lost 20% in the six weeks following Lehman Brothers' collapse in mid-September. Companies had sold the paper primarily to money market funds to fund day-to-day businesses operations, but the conservative funds shifted out of the market.

The CPFF helped bring the commercial paper market nearly all the way back to pre-Lehman levels, but this week's Fed report showed another mass exodus from the once stable market.

Fixed income analysts think that the huge drop in financial commercial paper indicates that many banks opted instead to lend out debt to another government program, the FDIC's Temporary Liquidity Guarantee Program (TLGP).

"Corporations want to term out their commercial paper so they don't have to deal with the worry of having to roll over their short-term debt," said Van Order. "TLGP took the commercial paper worries away from financial companies."

The TLGP backs financial institution debt issued up to 10 years - not just three months, like the Fed program. The FDIC offers a guarantee to investors on certain company bonds, which in turn lowers the financing costs for businesses' debt issuance.

Another advantage to the FDIC program is that it guarantees debt that companies back with assets held on their balance sheets. Investors have largely been scared off by assets of any kind, as the credit crisis revealed the difficulty of understanding the value of many complex securities.

Still, experts say the commercial paper market - and the Fed program - remain critical to helping many companies meet their short-term financing needs.

"The commercial paper market is too critical to die, which is why the Fed focused so much attention on it," Van Order said. "It's still the most liquid market for companies." To top of page

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