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Cash Is King Once More
After many years where the "smartest guys in the room" borrowed as much as they could, leverage has become a dirty word. Cash, once again, is king.
When Debt Equals Death
As fear continues to mount in the credit markets, companies that have a high dependence on short-term funding for its operations in the form of commercial paper are particularly at risk. This trillion dollar market, which is relatively unknown to most investors, has shrunk considerably and seen rates go higher and maturities shorten as investors worry that issuers won't be able to repay.
Commercial paper is essentially short-term debt with maturity up to 270 days. The funds are typically used to fund operations and pay bills.
The total amount of commercial paper outstanding has fallen from $2.2 trillion to $1.6 trillion in the last 12 months. The term structure of that paper has also changed, with the longer term paper of more than 81 days shrinking, and paper with maturities of 1-4 days increasing dramatically.
So, how do you determine if a company has a dependence on short term funding? An investor can go to the balance sheet of a company and look at the section called "liabilities". This section will usually detail all the debt that a company owns. A company can also have short and long-term obligations that are off balance sheet, and these will usually be found in a footnote in the annual report. (To learn how to analyze a company's debt, see Debt Reckoning and Breaking Down The Balance Sheet.)
Paper Tigers
General Electric (NYSE:GE) is one of the largest issuers of commercial paper and its financial services division had $202 billion in short term borrowings as of July 30, 2008. Its commercial paper obligations outstanding were $100 billion. The bottom line is that GE owed $100 billion to investors with a maturity of less than 270 days. The exact term structure of this debt is not known, but essentially every day GE has to go into the market and rollover its maturing commercial paper at whatever rate the market demands. If investors want, they can ask for the money back and not roll it over. This is one of the worries the market had that sent General Electric shares down by 15% last week. The company also has another $100 billion in other short term obligations to deal with.
Lehman Brothers (Nasdaq:LEHMQ) reported in its quarter ending May 31, 2008, that it had $7.9 billion in outstanding commercial paper. It also had $21 billion in long-term debt that was current.
Other companies with a large amount of commercial paper outstanding include Ford (NYSE:F) through its Ford Motor Credit operation. Ford had $16.3 billion of asset-backed commercial paper outstanding at June 30, 2008.
Bear Stearns, another casualty of the financial crisis, had $3.9 billion in commercial paper outstanding at February 29, 2008, and total short-term borrowings of $16.3 billion.
Bottom Line
Cash is once again king, although some investors never recognized when cash was dethroned, and have been worshiping it silently, awaiting its return.
To learn more, read Asset-Backed Commercial Paper Carries High Risk.
When Debt Equals Death
As fear continues to mount in the credit markets, companies that have a high dependence on short-term funding for its operations in the form of commercial paper are particularly at risk. This trillion dollar market, which is relatively unknown to most investors, has shrunk considerably and seen rates go higher and maturities shorten as investors worry that issuers won't be able to repay.
Commercial paper is essentially short-term debt with maturity up to 270 days. The funds are typically used to fund operations and pay bills.
The total amount of commercial paper outstanding has fallen from $2.2 trillion to $1.6 trillion in the last 12 months. The term structure of that paper has also changed, with the longer term paper of more than 81 days shrinking, and paper with maturities of 1-4 days increasing dramatically.
So, how do you determine if a company has a dependence on short term funding? An investor can go to the balance sheet of a company and look at the section called "liabilities". This section will usually detail all the debt that a company owns. A company can also have short and long-term obligations that are off balance sheet, and these will usually be found in a footnote in the annual report. (To learn how to analyze a company's debt, see Debt Reckoning and Breaking Down The Balance Sheet.)
General Electric (NYSE:GE) is one of the largest issuers of commercial paper and its financial services division had $202 billion in short term borrowings as of July 30, 2008. Its commercial paper obligations outstanding were $100 billion. The bottom line is that GE owed $100 billion to investors with a maturity of less than 270 days. The exact term structure of this debt is not known, but essentially every day GE has to go into the market and rollover its maturing commercial paper at whatever rate the market demands. If investors want, they can ask for the money back and not roll it over. This is one of the worries the market had that sent General Electric shares down by 15% last week. The company also has another $100 billion in other short term obligations to deal with.
Lehman Brothers (Nasdaq:LEHMQ) reported in its quarter ending May 31, 2008, that it had $7.9 billion in outstanding commercial paper. It also had $21 billion in long-term debt that was current.
Other companies with a large amount of commercial paper outstanding include Ford (NYSE:F) through its Ford Motor Credit operation. Ford had $16.3 billion of asset-backed commercial paper outstanding at June 30, 2008.
Bear Stearns, another casualty of the financial crisis, had $3.9 billion in commercial paper outstanding at February 29, 2008, and total short-term borrowings of $16.3 billion.
Bottom Line
Cash is once again king, although some investors never recognized when cash was dethroned, and have been worshiping it silently, awaiting its return.
To learn more, read Asset-Backed Commercial Paper Carries High Risk.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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