Today's Wall Street Journal writes "New Credit Hurdle Looms for Banks", which follows a series of stories citing a large amount of floating-rate debt coming due and wide spreads in some funding markets. The stories neglect to point out, however, that there is always a large amount of corporate debt coming due, and that overall rates remain substantially lower than they were a year ago. Some of the buyers of floating-rate debt, such as enhanced cash funds, SIVs and securities lenders, have retreated from the market. But increased demand for supply from money market funds should more than compensate for the demise of the relatively minor enhanced cash sector.
The Journal says, "The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months." Later the Journal says, "Representatives of the banks said they're fully able to meet their floating-rate note obligations, either because they've already lined up the necessary funds or because they have ample customer deposits they can tap."
Bloomberg wrote an article yesterday (following a piece a week ago), entitled, "Merrill, Wachovia Hit With Record Refinancing Bill". The article cites the same JPM study but incorrectly refers to "specialized money funds." They should have said, "enhanced cash funds." The piece says, "The trouble now is demand from specialized money funds that readily bought the debt, swelling their assets under management to $200 billion in August last year, has evaporated amid their own losses. The funds, referred to as enhanced cash funds and run by firms such as Bank of America, now hold about $50 billion, according to Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts firm that tracks money-market funds."
Bloomberg and others have also cited the shift towards retail deposit-gathering by a number of large banks and brokers. While there undoubtedly are continued stresses in the market, Crane Data believes these articles are more reflective of reporters looking for some late-summer excitement rather than an indication that concerns have approached the levels of last March and November.
While the floating-rate and asset-backed markets are suffering, they're still functioning, albeit at reduced levels. And companies still have access to both the long-term bond market and the short-term commercial paper market, as well as to traditional bank deposit avenues for funding. Though they may have to pay a premium over Fed funds, keep in mind that the Federal funds target rate is still 325 basis points below its level of a year ago.
