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Signs of credit market thaw begin to emerge

Credit markets are beginning to thaw after months of a deep freeze.
/ Source: The Associated Press

Credit markets are beginning to thaw after months of a deep freeze.

In a promising turn that could bolster the economy, companies are selling bonds at a pace not seen since last spring. At the same time, companies are finding it easier to issue commercial paper, the short-term loans necessary for quick access to cash.

Global sales of new corporate debt jumped to $82 billion last week, the highest since $103 billion last May and nearly double the level seen right before the credit crisis intensified in September, according to data-tracker Dealogic.

The thawing means companies such as Cablevision Holdings Corp. can raise money more easily for everything from payrolls to paying down debt, an important shift that ultimately will benefit consumers.

If the trend continues, it would be the outcome that government officials have been seeking for months, as they pumped hundreds of billions of dollars into the financial system. More could be on the way.

Federal Reserve Chairman Ben Bernanke, in a speech Tuesday at the London School of Economics, indicated additional steps will be taken to stabilize the financial system beyond the $800 billion stimulus package being crafted by President-elect Barack Obama.

"History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," Bernanke said.

It's a fact of life for companies the size of Exxon-Mobil to the corner deli: They struggle if they can't borrow money. That's just what happened in the aftermath of the financial meltdown, as banks stopped lending and investors turned away from corporate debt.

A credit freeze hits the economy hard because it forces companies to lay off workers because they can't make payrolls and to cut planned expansions.

"There is a domino effect if companies can't borrow," said Len Blum, managing director at Westwood Capital. "The doughnut shop down the street from headquarters suffers because fewer people are coming in since there has been layoffs at the company."

To be sure, danger still looms in the credit markets. Bank lending remains at a trickle and it will likely stay that way so long as financial companies contend with massive losses tied to their mortgage-related assets and other bad debt.

Despite a taxpayer-funded bailout and moves by the Federal Reserve to loan more money to financial institutions, banks are still reluctant to lend.

That's due, in part, to the fact many are still struggling. Citigroup Inc., which lost more than $20 billion between October 2007 and October 2008, is expected to report next week another loss of $10 billion more for the three months of 2008, according to analysts. The government has already lent the embattled bank $45 billion and agreed to absorb the losses on a huge pool of mortgages and other distressed assets.

But other corners of the debt market are improving, which could put "a floor underneath the economy and sows the seeds for an economic recovery," said Tony Crescenzi, chief bond market analyst at Miller Tabak & Co.

Some of the renewed appetite has been for debt backed by the government, including a $10 billion General Electric bond offering. That was backed by the Federal Deposit Insurance Corp.'s temporary guarantee program, which was set up last fall to help companies get financing.

Investors also have renewed interest in speculative bonds — also known as "junk" — that offer higher interest rates than they could get by owning U.S. government debt, where yields have plummeted to record lows in the last month. The yield on two-year Treasury note now stands around 0.75 percent.

By paying higher yields, companies compensate investors for the higher risk of default that comes from owning such bonds.

Cablevision subsidiary CSC Holdings Inc. set out to raise $500 million in its high-yield offering last week, but strong demand brought in $844 million for the media and cable company. Bethpage, N.Y.-based Cablevision, which sold the five-year notes with an interest rate of 11.375 percent, will use the proceeds to pay down $1.7 billion in debt coming due this year.

Being able to pay down the debt is important because the company won't have to tap bank loans or cut other expenses to cover interest or principal payments.

On top of that, investors moved $882 million into high-yield corporate bond funds last week, the largest since September 2003, according to AMG Data Services.

Another significant shift in credit markets is showing up in the substantial increase in the issuance of commercial paper, which companies sell as a low-cost source of cash used to meet short-term financial needs.

According to the latest figures by the Fed, commercial paper outstanding increased by $83.1 billion, or nearly 5 percent, to a seasonally adjusted $1.76 trillion in the week ended Jan. 7. That puts it close to the $1.82 trillion that was in the market in September before Lehman's failure.

The Fed has also ratcheted down its key interest to hover between zero and 0.25 percent, a record low. In that move last month, the central bank signaled it would hold rates at such levels for some time to help cushion the blows of a recession that has just entered its second year.

The actions by the Fed and other central banks around the world have pushed down borrowing costs. The London Interbank Offered Rate, or Libor, now stands around 1.09 percent, its lowest level since June 2003 and about a quarter of what it was in October, according to the British Bankers' Association.

It's not just businesses that are benefiting from improving credit conditions. Mortgage rates have also tumbled since the Fed in November announced plans to spend up to $500 million to buy mortgage-backed securities in an effort to bolster the ailing U.S. housing market.

The average rates on the 30-year mortgage fell to 5.01 percent last week, the lowest since Freddie Mac started tracking the data in 1971.