Fitch: Commercial Paper Rates Rise Ahead of Money Fund Reform

NEW YORK--(BUSINESS WIRE)-- With less than two months remaining ahead of money market fund (MMF) reforms coming in October, the commercial paper (CP) market has experienced falling demand and rising borrowing costs, according to a new 'U.S. Commercial Paper Monitor' from Fitch Ratings.

"Prime money fund managers have been maintaining extremely short maturity profiles as they are reluctant to invest in securities maturing beyond Oct. 14 when money fund reforms comes into effect, which has reduced prime MMF demand for three-month and longer CP," said Greg Fayvilevich, Senior Director, Fitch Ratings.

As of June 30, 2016, prime funds had $89.8 billion, or 30.2% of total CP, invested in CP with tenors of 3-Months or longer compared with $53.6 billion, or 19.6%, as of July 31, 2016. Falling demand for long dated paper has pushed borrowing costs higher with Tier 1 90-day CP rates increasing from 0.66% to 0.74% over the same period. Following the December 2015 Fed rate hike, the Tier 1 90-day CP rate has increased more than 30%.

When money fund reform takes place prime institutional funds will convert to a floating net asset value (NAV) and may be subject to liquidity fees and redemption gates and market liquidity may be more limited at that time.

"Money fund holdings of asset-backed CP, Financial CP and Nonfinancial CP markets have decreased in recent months and the falling demand for CP and rising borrowing cost could be a challenge for some CP issuers," added Fayvilevich.

Outstanding foreign financial CP slipped to $257 billion as of end-July, the lowest level since early January. From June to July, approximately 50% of the top 40 Fitch-rated Financial CP issuers and the top 30 Fitch-rated Nonfinancial CP issuers within money funds experienced declines in allocation to money funds. Within financial CP issuers, the median outflow is around $900 million. For nonfinancial CP issuers, the median outflow is around $72 million.

Customarily, prime funds have held a considerable amount of outstanding asset-backed CP. Since the beginning of the year, asset-backed CP holdings within prime money funds have fallen substantially, decreasing $44 billion between end-January and end-July.

Additionally, some corporates rely on commercial paper extensively for short term funding. As of July 31, Toyota Motor Corporation was the largest Fitch-rated nonfinancial issuer. It experienced more than a 15% decline in MMF allocation from June to July.

Fitch's U.S. Commercial Paper Dashboard provides investors with an accessible portal for market data and investor sentiment. Given money market funds' key role in the commercial paper and short-term debt markets, this report includes U.S. prime money funds' top allocations to CP issuers in the financial, non-financial, and asset-backed commercial paper sectors (as reported by Crane Data LLC). The report provides access to Fitch's most recent ratings and commentary on CP issuers and the short-term markets.

Additional information is available at 'www.fitchratings.com'.

Related Research

U.S. Commercial Paper Monitor

https://www.fitchratings.com/site/re/886884

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160830005954/en/

Fitch Ratings
Greg Fayvilevich
Senior Director
+1-212-908-9151
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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