The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
MONTHLY
Buaitma extent
IN
FEDERAL RESERVE BANK of CLEVELAND ----
T H IS I S S U E
Use of Commercial Paper to the Fore.. . .3
Notes on Federal Reserve Publications. . .9
Octo&e% I9 6 0
New Year in Autos.......................... .10
COMMERCIAL PAPER O U TSTA N D IN G
D i r e c t ly P l a c e d F i n a n c e P a p e r a n d P a p e r P l a c e d T h r o u g h D e a l e r s
Billions of dollars
(plotted at year-end)
DIRECT
0
1920
Additional copies of the MONTHLY BUSINESS
REVIEW may be obtained from the Research De
partment, Federal Reserve Bank of Cleveland,
Cleveland 1, Ohio.
Use Of Commercial Paper To The Fore
h e ter m
commercial paper has been used
growth in the amount of commercial paper
placed directly with investors by some of the
traditionally to describe the various types
of short-term credit instruments issued by large sales finance companies. During the
1920’s and early 1930’s all borrowing and
business and banking firms to raise funds.
lending by major industrial concerns that
In recent years, however, the term has been
was carried on in the commercial paper mar
employed more and more to mean specifically
the short-term promissory notes issued by a
ket was done through commercial paper deal
ers. The introduction of directly-placed paper
relatively small group of business firms which
took place in the mid-1930’s. After making
borrow funds in the money market.
fairly sizable inroads, the amount of directlyAs the meaning of the term has tended to
placed commercial paper was reduced to vir
narrow, the use of commercial paper to raise
tually
nothing during the abnormal credit
funds has increased markedly. Over the en
situation
of the war period. Since 1945, how
tire postwar period, following the wartime
ever, finance paper placed directly with in
episode when the use of commercial paper
vestors has moved into prominence in the
had been reduced substantially, the amount
commercial paper market, amounting cur
of commercial paper outstanding has climbed
rently to more than three times the amount
to a level which is nearly four times as great
of paper placed through dealers.
as the prewar record level reached in 1920.
T
Moreover, in 1960 alone the amount of com
mercial paper outstanding has increased by
more than $1.5 billion, reaching a total of $4.6
billion as of the end of July.
The commercial paper market, as defined
above, is the oldest of the various segments
of the short-term money market. Although
the market can be traced in financial history
as far back as the early 1800’s, it developed
essentially the present form early in the
twentieth century. Then, as now, business
firms, which are rated highly by the market,
obtained short-term funds by issuing un
secured notes on a discount basis through a
small number of commercial paper dealers.
The maturities of the unsecured notes have
usually ranged from four to six months,
although, currently, some are as short as five
days while others run over nine months. The
denominations of the notes vary, but they
are for the most part in multiples of $5,000.
One of the more significant developments
in the postwar commercial paper market, as
compared with the market during the early
part of the century, has been the marked
The rapid postwar growth in the commer
cial paper market, and especially the more
recent expansion, has paralleled the growth
in the demand for working capital on the
part of business firms. Since the market is
not generally considered a source of perma
nent working capital, borrowers use it mainly
to supplement short-term bank loans in meet
ing peak seasonal and cyclical needs. On the
other hand, the sales finance companies that
are active in the directly-placed market, in
order to satisfy a growing, yet highly flexible,
demand for their services, have tended to
tap the market more or less continuously.
The extent to which firms have been able
to satisfy their working capital demands by
selling commercial paper has, of course,
depended upon the supply of funds available
in the market at any one time. During the
1920’s, commercial banks were the major
suppliers of funds in this market, holding
about 90 percent of the amount outstanding.
Country banks and small city banks, in par
ticular, held a large volume of commercial
paper as secondary reserves.
3
NET W O RTH OF C O M M E R C IA L PAPER BORROW ERS
(4 selected years)
P er c en t of bo r r ow er s
IUU
Firms with net worth of:
80
_
60 -
_
40
\
< OVER $25 MILLION
\
\
M $5 to $25 MILLION
k
\
\
\
\
\
:■ > 1 '
V ■
''V' V .:
-
V
:
S*S^ yx >
.v
20 -
\
< $1 to $5 MILLION
\
\
_
o
1945
1950
1955
:rd ,
......
< LESS THAN $1 MILLION
1959
Source of da ta : N ational Credit Office, New York, N . Y .
In the past several years, although banks
have continued to acquire commercial paper,
there has been a large-scale entry of new
types of purchasers. Recent purchasers in
clude such diverse groups as non-financial
corporations, pension and trust funds, in
surance companies, and college endowment
funds. Of these, nonfinancial corporations
are estimated to hold over 50 percent of out
standing paper.
The continuous growth in the liquid funds
of these groups, which has provided a major
portion of the supply of funds to the market,
has been an important factor in the postwar
growth, as well as in the very recent expan
sion, of the use of commercial paper.
As a result of the influx of new buyers, one
of the striking features of the present com
mercial paper market is that it is increasingly
becoming a market in which various institu
tions in competition with the banking system
are meeting part of the short-term demands
of business firms.
Fewer Borrowers in Dealer Market
From a relatively low level, at the end of
the war, the amount of paper placed through
dealers, which represents now a minority of
4
the commercial paper market, has recovered
to the extent that its dollar volume is now
approximately at the level of 1920 when all
commercial paper was placed through deal
ers. In striking contrast to the postwar
expansion in dealer paper, however, has been
the sharp drop in the number of borrowers
in the market. In 1959, only 335 qualified
firms offered paper through dealers, as com
pared with nearly 4,400 during the 1920’s.
Since borrowers have not numbered more
than 450 in any year in the postwar period,
the greatest portion of the decline in the
number of borrowers obviously occurred
prior to World War II. It is thus significant
that the entire expansion since 1945 in out
standing dealer paper has originated from
less than one-tenth of the number of firms
selling paper during the 1920’s.
During the postwar period, there has been
a marked trend toward relatively larger
firms using the market as a source of short
term funds. As shown in the accompanying
chart, whereas 80.8 percent of the borrowers
had a net worth of under $5 million in 1945,
only 31.6 percent had a net worth of under
$5 million in 1959. The trend cannot be
attributed to short-term cyclical influences,
since the movement toward the $5-25 million
and the over-$25 million classes has taken
place steadily throughout the postwar period.
C O M M E R C IA L PAPER BORROW ERS
A C C O R D IN G TO INDUSTRIES
The nature of the dealer commercial paper
market is such that only large firms which
have impeccable credit ratings and which are
well-known to investors can sell commercial
paper. At present, ten dealers purchase the
unsecured promissory notes of business firms.
Since dealers do not endorse the notes when
purchased and since holders may wish to dis
pose of the notes before maturity, the name
of the company must largely sell itself.
Furthermore, notes are sold with the provi
sion that investors can return them if they
are not satisfied with the firm’s record. As
may be expected, however, losses have been
practically negligible.
1959
Although investors in the commercial paper
market are located throughout the United
States, as well as in some foreign countries,
particularly Canada, borrowers in the mar
ket have been concentrated near the money
market centers of New York and Chicago.
Historically, about 80 percent of the borrow
ers have been located in the eastern half of
the United States.
Despite the decline in the number of bor
rowers in the commercial paper market, a
considerable variety of borrowers continues
to be represented. As shown in the accom
panying chart, the principal classifications of
borrowers include manufacturers, finance
companies, wholesalers, and retailers. During
1959 manufacturers and finance companies,
combined, comprised about three-fourths of
the total number of borrowers. The manufac
turers group included food and related prod
ucts, textiles, and metal products; automobile
finance companies accounted for the major
part of the financial classification.
Although requirements for issuing com
mercial paper are relatively rigid, the market
does provide an important alternative source
of funds for seasonal and cyclical needs for
qualified firms. In addition, there is a pres
tige factor which apparently tends to enhance
the firm’s ability to borrow in the long-term
end of the market.
MANUFACTURERS
42%
FINANCE
Food processing,
12%
Textiles,
10%
Metal products,
8%
Other,
12%
Automobile,
18%
Small loans,
10%
32%
Other,
13%
4%
WHOLESALERS
Department stores,
8%
Other
3%
MISCELLANEOUS 2%
Source of da ta : National Credit Office, New York, N. Y .
Another factor in the use of commercial
paper as an alternative source of credit has
been the statutory ceiling on bank loans to a
single large borrower. Because of the rapid
growth in financing needs, many major in
dustrial concerns have found themselves at
the legal maximum of commercial banks.
Further expansion of loans from commercial
banks is thus realizable only through resort
to additional banks.
Role of Finance Companies in the
Directly Placed Paper Market
During the postwar period, the directlyplaced commercial paper market has steadily
expanded to become an important source of
short-term funds for the large sales finance
companies. In addition, an exceptionally
rapid expansion in directly-placed paper be
gan early in 1959.
5
M A JO R SO U RCES OF FUNDS OF
SALES F IN A N CE C O M P A N IE S
(end-of-year)
B ill io ns of do ll ar s
mobile dealer financing, the finance companies
have relied heavily upon borrowed funds.
The expansion in automobile credit has fluc
tuated widely from year to year. As a result,
sales finance companies, in order to maintain
some flexibility, have borrowed largely by
means of short-term obligations.
Between the end of 1946 and the end of
1954, the large sales finance companies in
creased their use of bank lines of credit by
nearly the same amount as their outstanding
commercial paper. Beginning in 1955, there
have been at least two periods when the use
of commercial paper has increased markedly
relative to the use of bank credit. Specifically,
during 1955 and since the beginning of 1959,
the relatively large expansions in demands
for automobile credit have prompted addi
tional use of commercial paper.
R ati o S e a l e
N ote: Other, but relatively less important, sources of funds
include capital accounts, subordinated term debt, and
other liabilities.
C h a n g e s in f e t a l fu nds e m p l o y e d b y sa les fi nance
c o m p a n i e s d u r in g r e c e n t ye a rs ha v e l a r g e l y take n
t he f o r m of changes in the v olu m e of s h o rt - te rm
cre dit.
With the entrance of one company in June
of this year, there are now ten sales finance
companies, including the four largest, which
place commercial paper directly with invest
ors. The finance companies borrowing short
term funds this way have developed their
own staffs and facilities necessary for selling
their paper more or less continuously to in
vestors throughout the year.
Since the end of the war, sales finance com
panies have been under constant pressure to
meet the very large increase in the demand
for their services. In order to meet such
demand, which consists primarily of auto
6
The sources of funds available to the sales
finance companies, of course, include both
short- and long-term borrowing, as well as
capital accounts. However, the use of short
term credit has been the most flexible of the
various sources of funds. This is shown in
the fact that changes in the volume of short
term borrowing by sales finance companies
have closely paralleled the course of the last
two cyclical expansions of total employed
funds in 1955 and 1959-60. (See chart.)
Direct placement of commercial paper has
displayed a more consistent and less volatile
rate of growth since 1954 than short-term
bank loans. During the 1955 upswing in total
employed funds, short-term bank loans grew
more rapidly than commercial paper. (See
chart on page 7.) However, in the more
recent cyclical expansion, beginning in 1959,
the rate of rise in the outstanding commer
cial paper of the sales finance companies
equaled that of short-term bank loans, and
at midyear in 1960 commercial paper out
standing was growing more rapidly. More
over, the level of short-term bank lines in use
during the recent expansion of auto credit
has been somewhat less than at the end of
1955. Consequently, the directly-placed com
mercial paper of sales finance companies in
June of this year was nearly twice as large
SHORT-TERM FUNDS OF SALES
FIN AN CE C O M P A N IE S
(end-of-year)
B illions of do l la r s
rowers in the commercial paper market. How
ever, the spread between the commercial
paper rate and prime bank rate tends to
understate somewhat the actual difference in
cost of borrowing. Since commercial banks
have set minimum balance provisions which
require some proportion of the borrowed
funds to be kept on deposit with the bank,
the actual cost of bank funds available for
use may be greater than the stated rate.
At the same time, however, the spread be
tween the bank rate and the rate on commer
cial paper placed through dealers overstates
the differential between the two rates in that
dealers charge a commission, usually amount
ing, on an annual rate basis, to about onefourth percent of the unsecured notes.
Rat io S ca le
O f the t w o s o u r c e s of s h ort -te rm credit, c o m m e r
ci al p a p e r has s h o w n a m o r e c o n s is te n t ra t e o f ex
p a n s io n tha n s h o r t - te r m b a n k loans.
as short-term obligations with commercial
banks.
Rates on Commercial Paper
The open market rates on commercial paper
are relatively sensitive indicators of changes
in the supply and demand for short-term
funds. The open market rate is announced
by major dealers on the paper of their prime
borrowers. The rate has usually been from
one-fourth to one-half percent above the
Treasury bill yield, resulting in yield differ
entials which make commercial paper attrac
tive to investors.
The prime commercial paper rate has usu
ally been at least one percent below the prime
rate charged by major commercial banks to
their top-quality borrowers. The differential
in this case offers interest cost savings to bor
The directly-placed commercial paper rate
of the sales finance companies has generally
been slightly below the rate of borrowers in
the dealer market. Although the sales finance
companies in the directly-placed market pub
lish their rates separately, changes in the
rates of one company are usually closely fol
lowed by changes in the rates of the other
companies. The offered rates are listed ac
cording to the maturity of the notes, and
have usually a differential of 1.25 percent
between the notes of five to twenty-nine days
and those over nine months.
As shown in the chart on the next page,
throughout 1959 the rate on commercial
paper placed through dealers moved steadily
toward the bank rate for prime borrowers.
The average differential between the bank
rate and the commercial paper rate moved
from .69 percent in the first quarter of 1959
down to .23 percent in the fourth quarter,
before lengthening to an average differential
of .73 percent in the first seven months of
1960. Since the spread has customarily been
about one percent, the cost of commercial
paper relative to bank credit has been rather
large throughout most of the period from
early 1959 through July 1960.
Despite the increased cost of commercial
paper relative to bank credit, the amount of
outstanding paper grew rapidly during 1959
7
SELECTED SHORT-TERM M ONEY RATES
RATE
RATE
5.5%
5.5%
5.0
5.0
PR IME RATE ►
rm
\ r J ‘i
4.5
4.5
r
i
4.0
J r " u . r .-
\
i
A
. J
L
.
;
J
1
h-4 { C O M M E R C IAL PAPER _
1
(Prime 4 o 6 mos.)
uh
"1
u
*
\:
r
rm
___r ' ” '
3.5
^
•
4.0
3.5
L
•
• \ •
" I.
•
3.0
3.0
V
91-DA\
►
TREASURY BILLS
2.5
2.5
V
2.0
2.0
PLOTTED W EEKLY
1
'.I..
10
.
T
20
1
30
.
40
1959
and especially during the first seven months
of 1960. During 1959, however, the increase
in outstanding paper was due wholly to the
directly-placed market of the sales finance
companies. It was not until the beginning of
1960, when the demand for credit became
more widespread, that the amount of out
standing paper placed through dealers ex
panded rapidly.
Commercial and industrial loans at mem
ber banks in leading cities rose about 2 per
cent, from $30.5 billion to $30.9 billion, dur
ing the first seven months of 1960. Contrasted
with this is the rise in commercial paper
outstanding placed through dealers, which
amounted to about 80 percent (from $627
million to $1,116 million) during the JanuaryJuly period of 1960.
One factor in the ability of major corpora
tions to obtain funds in the commercial paper
market has been the level of the rate on com
mercial paper relative to Treasury issues
with comparable maturity. The average
spread between the dealer paper rate and
the Treasury bill rate during 1959 was .57
percent, but it averaged .97 percent during
.. ............
lO
1
1
20
I
30
1
40
1960
the first seven months of 1960, in contrast to
the customary spread of one-fourth to onehalf percent.
Seasonal Patterns in Data
One feature common to the firms which
place their paper through dealers is the sea
sonal nature of their operations. For these
firms, commercial paper serves as a source of
funds to finance seasonally large inventories
or a particularly large volume of accounts
receivable. For example, large retailers, such
as department stores, sell commercial paper
to finance heavy inventories during the fall
and Christmas seasons. Also, textile mills and
food processing firms, such as flour mills, tap
the market during harvest seasons to accom
modate the large purchases of cotton and
grain.
As evidenced by the monthly data on com
mercial paper placed through dealers, the
amount outstanding increases at the end of
the summer, rising to a seasonal maximum
during November. Outstandings increase
again during February, reaching a peak in
March, before declining through the summer
months.
In the past few years, however, swings in
the monthly m a g n i t u d e s have become
sharper. Downswings have occurred not only
in December, but also during the months of
April, June, and September. The timing of
such seasonal downswings corresponds to the
tax payment months of corporations. During
these months, when corporations are less
liquid, the finance companies increase their
use of lines of bank credit, so as to satisfy
continuing needs for relatively large amounts
of short-term credit.
Since the large sales finance companies in
the directly-placed market sell paper more
or less continuously throughout the year, a
relatively small amount of monthly fluctu
ation of paper outstanding might be expected.
In fact, during the early part of the past
decade, this was largely the case, since the
amount outstanding rose consistently through
out the year and contracted sharply only
during the month of December.
NOTES ON FEDERAL RESERVE PUBLICATIONS
Among the articles recently published in the monthly business reviews of
other Federal Reserve banks are:
“ The Outlook for U. S. Foreign Trade” , Federal Reserve Bank of Chicago,
September 1960.
“ The Seaway and Iron Ore” , Federal Reserve Bank of Minneapolis,
August 1960.
“ The Emerging Common Markets in Latin America” , Federal Reserve
Bank of New York, September 1960.
( Copies may be obtained without charge by writing
to the Federal Eeserve Bank named in each case.)
*
*
*
“ The Seasonal Squeeze” is the title of a detailed special study of seasonal
banking patterns in the Third Federal Reserve District. Copies of the booklet
are available without charge from the jmblisher, the Federal Reserve Bank of
Philadelphia, Philadelphia, Pennsylvania.
9
The changing pattern of consumer demand is re
flected In the growing market shares of foreign
makes and domestic compacts . . .
N ew Yec
m o n t h marks the opening of a new
model year for the auto industry. Look
ing back, auto makers can view a fairly suc
cessful 1960 model run, but one that was
characterized by shifting consumer prefer
ences. As it embarks upon the 1961 model
year, the industry is still in a period of
transition.
T
. . . as well as In the number of new domestic
makes offered . . .
h is
One measure of the change in the pattern
of auto demand is the number of individual
makes offered. In the model year just begin
ning, 26 different nameplates will be featured
as compared with only 17 makes at the begin
ning of the 1959 model run. The recent in
crease reverses the long-term decline in the
number of makes offered, which reached a
low just about two years ago.
. . . stimulating interest in new cars which, so far
this year, are selling at a rate second only to the
1955 high.
A U TO P R O D U C T IO N , U . S
! \ f r \ /A' Vr
r l
SA LES O F N E w \
D O M ESTIC C A RS
>
S A LES O F N EW F O R E IG N C A R S
T
The growing popularity of the compact
car was largely instrumental in enlarging
the number of makes available. Ten makes of
compacts are among the 1961 domestic offer
ings as compared with only one compact in
the 1958 model year. The rapid acceptance of
these smaller vehicles is demonstrated by the
fact that they accounted for one-fourth of
the 1960 model production, when only six
makes of compacts were produced. Also, sales
of compacts through the first seven months of
this year more than tripled from the same
1959 months.
Consumer acceptance of domestic compacts
seems to have halted the rise in the popular
ity of foreign-made automobiles. Sales of
imports have begun to slide, trailing the
record year-ago level by 7 percent at mid
year, thereby ending the rapid growth in
sales of imported cars which began about
1956. U. S. compacts also seem to have proven
Leveling of new ear prices and a decline In used
car prices, together with impact of lower-priced
compacts I not shown in price chart I . . .
popular in world markets and have helped to
reverse the declining trend in new car
exports.
Total new car sales during the first half of
1960 were running at an annual rate of about
6.7 million units, with domestic makes selling
at around the 6.2 million rate. During this
same period, domestic output approximated
a 7.0 million annual rate, tending slightly
downward as the year progressed and as
dealer inventories of new domestic makes
reached record levels slightly in excess of 1.0
million units. It should be noted that new
record levels in dealer inventories of the 1961
models might be expected, if sales hold near
recent levels, since four additional compacts
will be included among the new models.
The rapid rise in the compact’s popularity
has had several important economic ramifica
tions. They require less materials per unit to
produce, for example, which has caused some
concern among the industry’s suppliers. Also,
they are somewhat less expensive to operate,
traveling farther on each gallon of gasoline
than many of the larger models. Of particu
lar interest to bankers is the considerable
impact that the compacts have had upon the
price structure in the auto market and, con
sequently, upon the amount of credit needed
to support a given level of unit sales.
Official measures of factory list prices,
which include only standard models and do
not yet reflect the new compacts, decreased
fractionally with the introduction of the
1960 models. Making allowance for the lower
prices of the popular compacts would reduce
the average factory delivered price by more
than 5 percent. Also, coincident with the
. . . help explain why new auto credit extended
this year has failed to rise markedly, altho' re
payments are up sharply . . .
B i l l i o n d o l l a r s - S e a s o n a l l y a d j u s t e d q u a r t e r l y at a n n u a
20 I---------------------------------------------------A U TO C RED IT EXTEN D ED
A
/
/A
/
^
a
-
/
Z
w
A U TO C RED IT R EP A ID
. . . thus resulting In a much smaller net expan
sion of auto credit than last year, despite higher
unit sales.
NET C H A N G E IN
O U T S T A N D IN G
introduction of the ’60 compacts last year,
used car prices reversed a protracted up
trend, declining by more than 10 percent by
mid-1960. Thus, average prices of both new
and used cars have declined in the past year
as production and sales rose to rather high
levels.
There is evidence that the lower price
structure has had some effect upon the
amount of credit needed to finance auto
mobile purchases. On new cars, for example,
the proportion of the total number of cars
which has been sold on credit so far this year
does not differ significantly from the propor
tion for the similar 1959 period. Yet, the
amount of credit extended to support a
higher level of sales is about the same as
last year.
The somewhat lower price structure, then,
helps to explain why new credit extended to
passenger car purchasers has not risen much
12
above 1959 highs while sales have risen sub
stantially. Repayments on outstanding instal
ment debt on automobiles have continued to
rise through this period, however, along with
the growth in auto paper outstanding.
The leveling tendency of credit extensions,
taken together with the rise in repayments,
is reflected in the decrease of nearly 20 per
cent in the net flow of new money into auto
financing during the first seven months of
1960. (For comparative purposes, this per
centage change is translated into an annual
estimate in the final chart.) Thus, consumer
demand for automobiles is not resulting in
as much credit expansion as last year even
though consumer purchase? of cars are
greater. While the change in consumer pref
erences is not the only factor involved, the
auto buyers’ acceptance of the new compacts
certainly played a part in the lessened de
mand for credit.
@FedFRASER