Bay State businesses yet to feel much relief

Credit still tight despite Fed action

Companies again yesterday faced higher short-term borrowing costs, leaving Massachusetts business leaders concerned that the coordinated actions by the world's central banks have so far failed to unlock credit markets.

Few companies are even bothering to test the frozen credit markets, reasoning that any attempt to raise money would be futile.

"Commercial paper issued by very solid companies is not selling," said Robert MacIntosh, a vice president of investments for Eaton Vance. "If even the best companies can't do it, that shows you how bad things are. At a certain point, companies are not going to be able to meet payroll and fund inventories."

Some borrowing rates on corporate commercial paper, the short-term loans that companies use to fund routine operations, nudged down slightly yesterday, after the Federal Reserve announced a half-point cut in its benchmark rate. On Tuesday, the Fed said it would create a fund to buy commercial paper from companies, hoping to jump-start a market that has shut on many businesses.

Overall lending rates remain high. Rates on loans of one to three months remain around 4.2 percent, compared with 2.4 percent in July, said James Rieger, a vice president at Standard & Poor's.

Investment executives said the credit markets aren't going to reopen overnight.

"It's going to take a while for the steps taken by the Fed to move through the system," said Laurie Carroll, managing director of Standish Asset Management, part of BNY Mellon Corp.'s investment operations that are based in Boston. "A lot of people want to start investing again, but no one wants to be the first to do it."

One borrower, however, did break through yesterday. The Commonwealth of Massachusetts was able to sell $750 million in short-term notes due next spring at 2.2 percent, after twice postponing the sale within the last week because of the tight credit markets.

"In the end, we were very successful in borrowing what the state needs," said state Treasurer Timothy Cahill.

Businesses have had no such luck.

"It's really dried up," said Mitch Appelbaum, an attorney at WilmerHale who arranges debt transactions for companies. "We haven't seen any short-term deals going into place in the past two or three weeks. It's starting to trickle down into smaller deals and businesses."

That could be particularly troublesome for retailers who borrow to buy inventory for the approaching holiday shopping season. Companies are already anticipating a downturn in sales because of the soft economy, and higher borrowing costs are another unwelcome development.

Jon Hurst, president of the Retailers Association of Massachusetts, said businesses are worried about how unpredictable financial markets are, especially after the various Federal Reserve actions have so far failed to reduce borrowing costs.

"Regardless of the interest rate cuts, people are still looking at an extra point higher because of the market turmoil," Hurst said.

A key question for companies is whether the traditional buyers of short-term debt, money market mutual funds, are willing to buy any investments that could be viewed as more risky than US government securities.

Peter Crane, editor of crane data.com, which follows money market mutual funds, said there's some evidence the funds are resuming purchases of municipal and corporate commercial debts after steering clear of the sector in the prior few weeks out of fear they might not be repaid. One explanation, he said, is the federal government's recent guarantee of money market mutual funds.

But Crane cautioned that these mutual funds won't buy again at their normal pace until customers replenish them with cash. "Commercial paper isn't going to recover until money funds recover, and that happens when people stop taking money out," Crane said.

Demand for commercial paper, typically considered a safe investment, plummeted after the September bankruptcy of Wall Street firm Lehman Brothers Holdings Inc. caused losses at some funds.

Casey Ross can be reached at cross@globe.com. Ross Kerber can be reached at kerber@globe.com.