Textron, AEP Ask Fed to Buy More Commercial Paper

By Robert Schmidt and Bryan Keogh

Nov. 13 (Bloomberg) -- A group of companies including Textron Inc., Home Depot Inc. and Honda Motor Co. are pressing the Federal Reserve to expand purchases of commercial paper to include them, two people briefed on the matter said.

The coalition, which also counts Dow Chemical Co. and Nissan Motor Co. as members, wants the Fed to go beyond top-rated paper and buy debt with the second-highest grade, the people said on condition of anonymity. American Electric Power Co. Chief Financial Officer Holly Koeppel said the group is seeking to add more companies and preparing a letter to outline its case.

While accepting lower-grade debt could reduce borrowing costs for a broader group of companies, it would also expose the taxpayer to greater risk. The request is one of a number of attempts to get a share of federal rescues, with industries from automakers to heating-oil retailers seeking funds.

``Top-tier issuers are benefiting,'' while those that sell lower-rated paper are losing out because of the Fed's decision, said Garret Sloan, a short-term debt analyst at Wachovia Corp. in Charlotte, North Carolina.

Second-tier issuers of commercial paper, debt that matures in nine months or less and is a form of IOU for day-to-day expenses such as payrolls and rent, argue they're disadvantaged by the Fed's new Commercial Paper Funding Facility.

Interest-Rate Gap

Interest rates on the highest-ranked 30-day commercial paper fell to 1.04 percent today from as high as 4.28 percent on Oct. 9. By contrast, the rates on second-tier debt were 5.36 percent, compared with a high of 6.30 percent on Oct. 15.

The Fed ``needs to make sure that any program doesn't have an unintended consequence that really conflicts with what it's intended to do,'' Koeppel of American Electric, the biggest U.S. producer of electricity from coal, said in an interview.

American Electric has had to tap two revolving-credit facilities in part to pay off $400 million of commercial paper, Koeppel said.

The Fed only purchases commercial paper rated A-1, F1 and P- 1 by Standard & Poor's, Fitch Ratings and Moody's Investors Service respectively. Its holdings rose to $258.5 billion as of Nov. 12, in the third week of operation, central bank data showed today.

`Getting Nailed'

``Manufacturers that have A-2/P-2 paper are getting nailed,'' Senator Bob Corker, a Tennessee Republican, said at a congressional hearing two weeks ago. ``All of a sudden, they're at a 500 basis-point disadvantage and basically getting ready to lay people off,'' he said, pressing Fed Governor Elizabeth Duke to revise the central bank's policy.

Duke responded to Corker that the Fed's objective was to get the market ``moving again,'' and once the top-tier portion is reenergized, ``then that will move the other parts of the market as well.''

The Fed has argued that limiting the program to the highest- rated securities provides protection for taxpayers.

Andrew Williams, a spokesman for the New York Fed, which runs the CPFF, declined to comment. Kim Reingold, a Textron spokeswoman, had no immediate comment and Paula Drake at Home Depot declined to comment, while spokespeople for Dow Chemical and Honda couldn't immediately be reached.

Genworth Considering

Genworth Financial Inc., the insurer spun off by General Electric Co., is considering whether to join the coalition, spokesman Tom Topinka said in e-mail. The Richmond, Virginia- based company's short-term debt rating was cut to P-2 by Moody's Investors Service earlier this month.

Genworth has drawn down more than half of its $1.7 billion in revolving credit facilities to help repay outstanding holding- company debt.

Nissan is working through the American Financial Services Association, which represents about 350 consumer-finance companies, spokesman Steve Parrett said.

``A lot of companies that qualify below the A-1/P-1 level are good performing companies,'' said Bill Himpler, executive vice president at the Washington-based American Financial Services Association.

The commercial-paper market was roiled by the failure of Lehman Brothers Holdings Inc. in September, which prompted money- market funds, among the biggest buyers of commercial paper, to retreat into the relative safety of government debt.

Fed data show that the market for A-2/P-2/F2 paper is about $80 billion. Some issuers have publicly disclosed they've been having difficulties due to the surge in borrowing costs.

Textron, the Providence, Rhode Island-based maker of Cessna planes and Bell helicopters, had a little more than $2 billion of commercial paper outstanding with $3 billion of bank lines backing it up, Chief Financial Officer Ted French said during an Oct. 16 conference call with analysts.

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Bryan Keogh in New York at bkeogh4@bloomberg.net