Sept. 10 (Bloomberg) -- Corporations need to refinance almost $140 billion of commercial paper in Europe by the end of next week and will increase borrowing costs for companies, according to Deutsche Bank AG, Germany's biggest bank.

``This could be a pivotal seven to 10 days,'' Jim Reid, a credit strategist at Deutsche Bank in London, wrote in a note to investors today. ``This will inevitably lead to wider corporate spreads, especially in high yield.''

Borrowers are paying the most in six years on commercial paper, IOUs maturing in 270 days or less. The $1.2 trillion market for so-called conduits created by banks that use short- term debt to buy longer-term assets is seizing up as lenders refuse to provide credit amid the contagion triggered by record home loan delinquencies.

Yields on 30-day U.S. commercial paper soared to 6.33 percent from 5.47 percent on Aug. 9. The London interbank offered rate for one month in euros is at 4.45 percent, close to the six- year high of 4.5 percent last week.

Almost $60 billion of the commercial paper due this week and next is owed by conduits, firms set up by banks and companies to invest in longer-term assets, according to Reid. The debt is backed by bonds including asset-backed securities, as well as car loans, mortgages and trade receivables. The remaining $80 billion of commercial paper is unsecured.

Moody's Investors Service and Standard & Poor's assign their highest or second highest investment-grade credit ratings to most asset-backed commercial paper.

Wider Spreads

``It seems that even the commercial paper that is being refinanced is being rolled into shorter maturities,'' said Gertjan Vlieghe, director of European rate strategy at Deutsche Bank in London. As a result ``with each week that goes by, the stock of CP that needs refinancing is getting bigger.''

Corporate bond spreads are widening in part because banks are more focused on keeping their own conduits afloat than providing finance to other companies. The premium on European high-risk bonds over similar-maturity government debt has increased to 426 basis points from 358 basis points at the beginning of August, Merrill Lynch & Co. indexes show.

``Banks have a very limited appetite to hold bonds on their balance sheets given other, more pressing demands for their capital in the short term,'' Deutsche Bank's Reid said in a telephone interview today.

High-yield, high-risk bonds are rated below Baa3 at Moody's Investors Service and BBB- at Standard & Poor's.

Outstanding Paper

U.S. conduits have $959 billion of commercial paper outstanding, according to the Federal Reserve in Washington. European firms owe a further $230 billion of asset-backed commercial paper, of which about 59 percent comes due this month, Bank of America analysts in London led by Raja Visweswaran wrote in a report.

The repayments peak on Sept. 17 when the equivalent of $48 billion matures, according to Bank of America. The credit markets are likely to remain ``unsettled'' until then, the report said.

In the U.S., about $266.5 billion of asset-backed commercial paper is due in the next two weeks, according to the U.S. Federal Reserve in Washington. While the U.S. figure is almost double the amount due in Europe, it's below the $393 billion that matured in the past two weeks, according to the Fed's Web site.

The U.S. commercial paper market last week shrank for a fourth week, declining by $54.1 billion, according to the Fed. That included a drop of $31.3 billion in asset-backed commercial paper.

`Bloated Balance Sheets'

HBOS Plc, the U.K.'s largest mortgage lender, was forced on Aug. 21 to commit to refinancing about $35 billion of asset- backed commercial paper sold by its Grampian Funding LLC unit.

Banks' ``increasingly bloated balance sheets will not be good news for overall market liquidity,'' Deutsche Bank's Reid said in the note.

The overnight rates banks charge each other for dollars and euros fell for a third day, suggesting efforts by central banks to free up lending may be starting to pay off for borrowers needing money for the shortest periods.

The overnight rate for euros declined 50 basis points, or 0.50 percentage point, to 3.5 percent. The rate for dollars dropped 6 basis points to 5.34 percent, according to the British Bankers' Association.

To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Neil Unmack in London at nunmack@bloomberg.net

Last Updated: September 10, 2007 13:33 EDT