Weak Companies Struggle for Cash Despite Rate Cuts
By Jonathan Stempel

NEW YORK (Reuters) - Despite the Federal Reserve's efforts to invigorate the U.S. economy with four interest-rate cuts, many companies are unable to benefit from falling short-term rates because economic weakness has hurt their credit worthiness.


At the same time, the Fed's actions may backfire on healthy companies that choose to borrow now, because an improving economy could increase demand for capital and raise borrowing rates, making it costly to refinance.

``Declining corporate credit quality has reduced somewhat the stimulatory power of lower short-term borrowing costs,'' said John Puchalla, a senior economist at Moody's Investors Service, in a new report.

Since the end of December, the typical yield on top-rated commercial paper -- debt maturing in 270 days or less -- sold by non-financial companies has fallen to 4.39 percent from 6.4 percent, according to data compiled by the Fed.

Over the same period, the typical yield on medium quality, ''Tier-2'' paper sold by non-financial companies plunged to 4.74 percent from 7.35 percent, according to Fed data.

Nevertheless, companies are selling less short-term debt. The amount of outstanding commercial paper, a key source of financing for many companies, has this year plummeted more than $100 billion to $1.51 trillion as of April 18, Fed data showed.

Meanwhile, the amount of outstanding Tier-2 paper from U.S. companies slid 20 percent between December and March, to $96.3 billion from $120.1 billion, the data showed.

Part of the reason for the drop-off: rating downgrades.

Since October, Moody's, a credit rating agency, has downgraded 66 companies' short-term ratings and upgraded just 11. Downgrades ordinarily make it more costly for companies to raise cash.

In the case of commercial paper, downgrades to ``Prime-2'' by Moody's or ``A-2'' by Standard & Poor's, which are collectively known as ``Tier-2,'' also markedly shrinks the investor pool. Downgrades to even lower levels often shut companies out of the short-term market.

This year, Moody's said, weakening same-store sales growth has contributed to seven downgrades of retailers, including Dillard's Inc. (NYSE:DDS - news), Gap Inc. (NYSE:GPS - news), J.C. Penney Co. (NYSE:JCP - news) and Saks Holdings Inc. (NYSE:SKS - news).

Problems in Lucent Technologies Inc.'s (NYSE:LU - news) vendor finance portfolio led to a downgrade, it said. Write-downs from the bankruptcy of customer Winstar Communications Inc. (NasdaqNM:WCIEQ - news) and other bad investments contributed about $510 million to what the telecommunications equipment giant said on Tuesday was a second-quarter loss of $3.7 billion.

Slower earnings growth, equity buybacks and merger activity caused several other downgrades this year, Moody's said.

With some long-term rates now heading back up, some companies with healthier credit ratings may wish once again to turn to the short-term market. That worm could turn, though, if the U.S. economy strengthens, Puchalla said.

``A sharp fall in short-term borrowing costs will mitigate somewhat the stress from higher long-term yields,'' he said. ''However... short-term borrowings increase refinancing risk and interest rates could rise if a U.S. economic recovery begins to push money market rates higher by the end of the year.''


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