Commercial Paper Issued by Banks Outside U.S. Falls the Most in 10 Months

U.S. commercial paper outstanding sold by foreign financial companies and their domestic units fell the most in 10 months as fund managers trim holdings of the short-term debt issued by European banks.

Total debt has dropped $18.6 billion, or 4.8 percent, in May to an eight-month low of $365 billion, the Federal Reserve said today on its website. The amount outstanding has declined for the past four weeks.

Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, has been unable to renew about $1 billion of commercial paper this month, the Wall Street Journal reported yesterday, highlighting investor concerns that Europe’s sovereign debt crisis will saddle banks with losses.

That reflects “how fearful” U.S. fund managers are of BBVA as a counterparty risk, compelling the bank to turn to cheaper regional financing, Andrew Lim, an analyst at Matrix Corporate Capital LLP in London, wrote today in a note to clients.

“The funds are merely shortening maturities and letting paper roll off, rather than fleeing,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

Yields on top-rated commercial paper due in 90 days sold by financial companies have doubled in the past six weeks to 0.55 percent, the highest since June 2009, from 0.16 percent in February, according to Federal Reserve data. Issuance of the IOUs due in less than 10 days is the most since February 2009.

‘Squeezing Out’

“We would not view this technically as a ‘squeezing out’ as such,” Lim wrote. “BBVA can indeed borrow in the U.S. commercial paper market, but now at much higher rates than it could do before.”

BBVA posted first-quarter profit of 1.2 billion euros ($1.5 billion) last month as its bad loans stabilized. A spokesman for the lender, who asked not to be identified citing company policy, declined to comment.

Credit-default swaps on BBVA were unchanged at 224 basis points after surging to an almost three-week high of 235.5 basis points on May 25, CMA DataVision prices show.

Spanish banks increased borrowing from the European Central Bank for three months or more to 89.4 billion euros in April, the most in at least 1 1/2 years, according to data compiled by the Bank of Spain, as the country’s worst recession in 60 years drives up client defaults.

Deborah Cunningham, head of taxable money-market funds at Pittsburgh-based Federated Investors Inc., said her company had reduced the average maturity of European holdings in its funds while keeping steady its exposure in dollar terms.

Short-Term Paper

Federated’s money funds held $130.6 million in securities issued by BBVA and Spain’s biggest lender, Banco Santander SA, as of April 30, according to a statement posted on the company’s website. It held no other bank positions from Italy, Greece, Ireland or Portugal, all countries struggling with high levels of debt.

“If you looked at our portfolio you wouldn’t see any visible change,” she said. “But are we feeling more comfortable in terms of headline risk in buying three-month paper rather than six-month? The answer is definitely, yes.”

Federated managed $217.7 billion in money-market mutual funds as of April 30, according to Crane Data.

Issuance of IOUs maturing in less than 10 days climbed to $82.9 billion, Fed data show. Daily sales of commercial paper due in more than 40 days is averaging $7.55 billion a day this week, down from $9.11 billion in the previous period. That’s the least in four weeks.

New Rules

Commercial paper typically matures in 270 days or less and is used to finance everyday activities such as payroll and rent.

Companies are also issuing in shorter terms as money-market funds seek to comply with new rules set down by the U.S. Securities and Exchange Commission, according to David Glocke, head of taxable money-market investments at Vanguard Group Inc. in Valley Forge, Pennsylvania.

“We’ve seen average maturities come way in” across the industry, Glocke said.

The new requirements, which take effect May 28, force money funds to shorten the average maturity of holdings to 60 days from 90 days and keep 30 percent of their portfolios in cash or securities that can be liquidated within one week.

Vanguard managed $166 billion in money funds as of April 30, according to Crane.

To contact the reporters on this story: Bryan Keogh in London at; Christopher Condon in Boston at

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