Banks issue record amount of dollar debt to backstop commercial paper

By David Oakley and Michael MacKenzie
Financial Times, London
Wednesday, September 5, 2007

http://www.ft.com/cms/s/0/147bd4a4-5be0-11dc-bc97-0000779fd2ac.html

Banks are issuing record amounts of dollar-denominated debt as they fear more demands for cash from troubled structured investment vehicles, according to the latest figures.

Despite having to pay higher interest rates, financial institutions and investment-grade companies raised $53 billion in dollar-denominated fixed income debt last month -- the highest amount ever for August, according to Lehman Brothers.

The bulk of that $53 billion, which was also the 10th highest month in volume terms since 1992 according to Lehman, was raised by financial institutions as they sought to shore up their balance sheets amid the threat of a fully-blown liquidity crisis. When floating rate notes are included, issuance for financial institutions and investment-grade companies rises to just under $77 billion, according to Thomson Financial, also a record for the traditionally quiet month of August.

This was in sharp contrast to the high-yield market, which was in effect closed in August with only three deals in the US and not one in Europe.

The banks have increasingly needed large reserves of cash to provide credit lines to structured investment vehicles, or SIVs, which have been unable to fund themselves in the asset-backed commercial paper sector -- short-term notes backed by collateral such as mortgages -- because of a sharp rise in risk aversion.

Merrill Lynch and Citigroup are two examples of banks having to pay higher interest rates for refinancing. Merrill Lynch had to pay an extra $20 million a year for a 10-year bond it launched last month compared with a previous similar issue, while Citigroup had to pay an extra $7 million per year.

According to Dealogic, Merrill Lynch paid 180 basis points over Treasuries to issue $2.75 billion in 10-year dollar-denominated paper on August 22, compared with 107 basis points over Treasuries for the same maturity on April 26.

Citigroup paid 122 basis points over Treasuries to issue $1 billion in five-year dollar-denominated debt on August 20 compared with 52 basis points over Treasuries for an issuance of the same maturity on February 12.

Willem Sels, head of credit strategy at Dresdner Kleinwort, said: "Everybody has to pay more money anywhere, but in any period of volatility you tend to see the proportion of issuance from financials to corporates increase partly because banks can still raise money and partly because they must do so continuously."

The leading borrower of US investment grade debt last month was Citigroup with $7.8 billion. That was followed by Merrill Lynch, $6.2 billion; Deutsche Bank, $4.5 billion; Bank of America, $4.1 billion; Barclays, $4 billion; Morgan Stanley, $2.7 billion; Goldman Sachs, 2.5 billion; and Royal Bank of Scotland with $2 billion, according to Thomson.

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.