CP rollovers panic-free so far as Monday peak looms

LONDON, Sept 12 (Reuters) - Refinancing of a huge wave of maturing commercial paper borrowings this month -- critical to a stabilisation of dislocated credit markets -- has been panic-free so far but investors are cautious before the peak in the heavy rollover schedule on Monday.

Problems in the commercial paper market, which typically provides 3- to 6- month rolling finance to highly-rated companies and investment funds, stems from investor concerns about asset-backed CP -- where difficulty valuing battered U.S. subprime mortgages has seen many lenders boycott the market.

While most commercial paper coming due so far this week was being rolled over, analysts said shortening maturities for newly financed paper highlight a persistent lack of confidence.

An estimated $113 billion of euro commercial paper (ECP) is expected to mature by next Tuesday. The heaviest day of maturities is Monday and funding for this will need to be arranged on Thursday due to settlement horizons.

On Tuesday, around three-quarters of $10 billion worth of asset backed commercial paper (ABCP) rolled over, according to UBS, but with shorter average duration. ECPs tend to have longer maturity of 30-60 days compared with U.S. paper but the maximum maturity now for ECPs was 30 days.

"Maturity is definitely getting shorter because no one is going to lend past a month," said Meyrick Chapman, fixed income strategist at UBS.

"But it's like stacking it up. If you have average maturity of 60 days, if you roll into 30 days you are making shortage of 30 days more acute. Things are not necessarily getting better -- it's just not getting worse."

Chapman saw some demand for good quality paper but expected the concern over rollovers of commercial paper will linger at least until the end of 2007.

A structured credit specialist at a UK bank saw better liquidity in the past couple of days but the real test will come later on Wednesday and Thursday when the bulk of paper matures.

"Better liquidity was due to expectations for a U.S. interest rate cut; investors wanted to lock in at better rates," she said.

In the CP market, banks and companies regularly raise cash for operations by issuing paper that often matures in six months or less. When commercial paper comes due, the corporate borrower repays investors by "rolling over", or issuing more paper, effectively paying back investors with more borrowed cash.

A sharp rise in interbank lending rates following the troubles in the CP market has prompted the world's central banks to inject liquidity in emergency operation but uncertainty over the rollover has kept period lending rates at elevated levels.

KEY FOR INTERBANK RATES

The outlook for the CP market is key for interbank lending rates, where some banks have been forced to pay a higher premium to secure cash to meet their funding requirements given the near closure of the ABCP market.

At the same time, some banks are uncertain about whether many of their own sponsored investment vehicles -- which function mainly via financing in the ABCP market -- will be forced to make cash calls on them and are hoarding money as a contingency.

David Keeble, head of fixed income strategy at Calyon, said ABCPs were indeed having difficulty being refinanced.

"At present we can see that CP is rolling quite nicely. There are not too many ruptures. But ABCP, only 50 percent is rolling and the rest is not," he said.

"If we can get through the current cycle okay, then I expect we will be relatively clear until mid-October."

Analysts expect 150 billion euros of commercial paper need refinancing in the remainder of September of which 50 billion euros will be in ABCPs.

Earlier Bank of England Governor Mervyn King said in a submission to parliament's Treasury Committee that vehicles set up by banks and others to invest in longer-term securities were finding it "extremely difficult" to raise funding by issuing asset-backed commercial paper.

"The markets are now withdrawing short-term funding from such vehicles, a process not unlike a bank run," he wrote.

King added that vehicles have either been forced to borrow for shorter terms, or have been unable to issue at all.

For a factbox of Euro CP market, see [ID:nL11211271]

(Additional reporting by Nathalie Harrison, George Matlock and Richard Barley)