Bloomberg News

Europe Stress Seen in Rates on Commercial Paper: Credit Markets

September 12, 2011

Sept. 12 (Bloomberg) -- Societe Generale SA, BNP Paribas SA and Credit Agricole SA are being quoted higher rates than their competitors in the commercial paper market as the crisis in the euro zone spreads beyond Greece, Portugal and Italy.

Investors charged the French companies an average 6.7 basis points more to borrow three-month commercial paper on Sept. 8 than the rate the lenders said they could pay in the London interbank offered rate market, according to two buyers who asked not to be identified because the talks are private. As recently as July, the banks received CP rates that were lower than Libor.

Premiums on short-term loans are rising as odds of a default by Greece grows, with German Chancellor Angela Merkel preparing plans to aid her nation’s financial companies. BNP, Societe Generale and Credit Agricole, France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said.

“Money-market funds have been reducing their exposure to European banks,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts. “A market rate may be more indicative of where things stand than the manufactured rates going into Libor.”

Holdings Cut

The eight biggest U.S. money-market funds reduced their investments in French banks by 46 percent to $42 billion in the past 12 months, data compiled by Bloomberg and published Sept. 9 in the Bloomberg Risk newsletter shows.

Spokeswomen for all three banks, which are based in Paris, declined to comment.

Rates investors demand for banks in the commercial paper market rose above Libor last month for the first time since May 2010, when the Greek credit crisis worsened, according to one of the buyers, who asked not to be identified because the data are private. Rates on financial commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent, are usually below Libor.

Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debentures climbed to the highest level in more than two years last week.

Relative yields on company bonds from the U.S. to Europe and Asia expanded 10 basis points last week to 236 basis points, or 2.36 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread, which has widened from 170 at the end of July, is at the highest since Aug. 5, 2009.

Yields increased to 3.708 percent from 3.704 percent on Sept. 2. The Barclays Capital Global Aggregate Corporate Index has lost 0.94 percent this month, paring the gain for the year to 5.62 percent.

Default Swaps Rise

The cost of protecting corporate bonds from default in the U.S. rose to the highest level since July 2009. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed for a third day, increasing 4.3 basis points to a mid-price of 135.9 basis points as of 11:42 a.m. in New York, according to Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from 114.5 at the end of August. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Free Up Capital

Societe Generale plans to free up 4 billion euros ($5.4 billion) in capital through disposals by 2013 to reassure investors about its finances. The lender’s exposure to Greek bonds is about 900 million euros and it has “no significant” holdings of Irish or Portuguese debt, the bank said today in a statement.

Merkel’s government is aiding lenders and insurers that face a possible 50 percent loss on their Greek bonds if the next portion of Greece’s bailout is withheld, according to three people familiar with the matter, who spoke on condition of anonymity because the deliberations are private.

Moody’s placed the ratings of BNP, Societe Generale and Credit Agricole on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Cuts are likely as the review period concludes, said the people, who declined to be identified because the matter is confidential.

‘All Necessary Actions’

Group of Seven finance chiefs vowed on Sept. 9 to support banks and buoy slowing economic growth as Europe’s debt crisis roiled financial markets and threatened a global recession. Renewed fears that European policy makers are failing to prevent a Greek default and contain their debt woes prompted investors to sell stocks and push the euro to a six-month low against the dollar. European bank and sovereign credit risk reached all-time highs as 10-year Treasury and German bund yields fell to record lows on demand for a haven.

“We will take all necessary actions to ensure the resilience of banking systems and financial markets,” G-7 finance ministers and central bankers said in a statement released during talks in Marseille, France.

Moody’s currently rates BNP Paribas’ long-term debt at Aa2, the third-highest investment grade. Credit Agricole is rated Aa1, the second highest, while Societe Generale is Aa2.

SocGen Paper

As European debt issues roiled global markets, the top U.S. prime money-market mutual funds cut their assets invested in securities issued by European banks in July to the lowest level since 2008, according to a Fitch Ratings report last month.

The average rate for Libor set by the London-based British Bankers’ Association on Sept. 8 was 33.7 basis points, or 0.337 percentage point. The Federal Reserve’s 90-day rate for financial commercial paper was 28 basis points that day.

Societe Generale was charged 43 basis points to borrow the three-month commercial paper on Sept. 8, compared with its Libor submission of 35 basis points, the buyers said. Credit Agricole had to pay 45 basis points versus a submitted Libor rate of 39 basis points. BNP Paribas paid 41 basis points for the short- term debt compared with its submission of 35 basis points.

New York-based JPMorgan had the lowest cost among 18 banks to fund commercial paper at 5 basis points. That compares with a submitted Libor rate of 30 basis points.

Deutsche Bank AG was charged 35 basis points for short-term IOUs compared with 29 basis points for its Libor submission. Charlotte, North Carolina-based Bank of America Corp. was charged 32 basis points for commercial paper versus 31 basis points for its Libor submission.

‘Headline Risk’

Amanda Williams, a spokeswoman for Frankfurt-based Deutsche Bank, declined to comment. Kerrie McHugh of Bank of America didn’t respond to calls for comment.

Commercial paper investors are hesitant to lend to some European banks exposed to the debt crisis and are exacting higher premiums on concern they may be more affected by negative news, said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

By contrast, “issuers that people consider pristine credits and not carrying any headline risk get excellent execution,” Coard said. “It represents, to some degree, a flight to quality.”

--With assistance from Helene Fouquet and Fabio Benedetti- Valentini in Paris, Mark Deen, Radi Khasawneh and Gavin Finch in London, Simon Kennedy and Theophilos Argitis in Marseille, France and Shelley Smith in Hong Kong. Editors: John Parry, Alan Goldstein

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at

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