WSJ Writes on Commercial Paper
The Wall Street Journal writes that, "Finance Chiefs Lean on Commercial Paper to Trim Costs, Prepare for Rate Cuts." The brief states, "Finance chiefs are issuing debt in the commercial paper market to save on interest costs and prepare their balance sheets for a likely rate cut from the Federal Reserve. The short-term debt appeals to big, highly rated companies because it can quickly capture the benefit of falling interest rates. As commercial paper has a short maturity, typically ranging from days to months, companies reissue this type of debt frequently and, when rates fall, can do so at a lower cost. Commercial paper also can provide a less expensive alternative to bank loans. Companies issue commercial paper to fund working capital, weather seasonality in their cash flow or provide a bridge between long-term capital raises." The article tells us, "Issuance in the commercial paper market has broadly picked up since plunging during the pandemic, amid the initial economic shock caused by Covid and a surge in corporate bond issuance. As of Aug. 7, the amount of domestic commercial paper outstanding from nonfinancial companies increased 27% from a year earlier, to $238.7 billion, according to the Federal Reserve. Commercial paper programs are typically cheaper than credit facilities from a bank.... Prologis during the second quarter began to reap savings from a $1 billion commercial paper program that the warehouse giant launched in March.... With its new commercial paper program, Prologis is saving about a 0.6 percentage point compared with using its credit lines, Arndt said. The company should save millions of dollars a year by opportunistically shifting balances to its commercial paper program, he said.... The price that companies pay to issue commercial paper usually varies alongside the secured overnight financing rate, or SOFR." The Journal adds, "Colgate-Palmolive during the first quarter used commercial paper to fund the repayment of a $500 million bond. The consumer staples company has about $8.7 billion in total debt outstanding, including $1.6 billion in commercial paper, according to S&P Global Market Intelligence. 'At some point, we expect interest rates will come down…and that will help us keep our fixed-floating back in balance,' CFO Stanley Sutula said on an April 26 earnings call, discussing why Colgate-Palmolive chose to pay off the bond with commercial paper. A risk of issuing commercial paper is the possibility of a market shock that could reduce investor demand and leave companies with unexpected liabilities, credit analysts said. To guard against this risk, companies keep a portion of their credit lines undrawn as a backup. In March 2020, at the beginning of the pandemic, the Fed intervened in the market to ensure companies could continue to borrow."
