[NYTr] Banks issue record amount of dollar debt to backstop commercial paper

[All the News That Doesn't Fit]

Financial Times - Sep 5, 2007
http://www.ft.com/cms/s/0/147bd4a4-5be0-11dc-bc97-0000779fd2ac.html


Banks issue record amount of dollar debt 
to backstop commercial paper

By David Oakley and Michael MacKenzie

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.