August 16, 2010
The Money is Starting to Flow
Posted by Gordon Smith

We have been talking about "frozen" capital markets for so long, it may be hard to remember a time when money flowed freely, but that time may not be far way. After hearing news this morning of Hulu's plans for an IPO, I was thinking about the prospects for the IPO market during the coming year. We all expect GM to file for an IPO this week, and I am of the school of thought that figures a successful GM IPO will open the market for other firms. Listening to a local business executive whose firm is testing the waters, I think we will see a large number of firms take the plunge within the next year if GM is successful.

Marketplace had a story on IPOs this afternoon, but it also had an even more encouraging story about commercial paper. The market for commercial paper is humming, driven by low, low interest rates. Scott Grannis explains the (potential) significance:

Here's an obscure but important measure of credit availability and financial market health that shows dramatic improvement year to date: nonfinancial commercial paper issuance (i.e., short-term obligations of large, generally highly-rated companies, typically used to fund short-term credit needs such as accounts receivable and inventories). That this measure has jumped over 50% in less than eight months is a very positive sign in my book. For one, it means that credit markets are vibrant: not only are large corporations willing to take on extra debt, but investors are willing to buy it. And since commercial paper rates are extraordinarily low (about 0.25% for 60-day paper), the availability of very cheap financing appears to be encouraging companies to expand their operations.

The commercial paper market is only half what it was at its peak in 2007, but seeing the words "confident" and "vibrant" in place of "frozen" or "stagnant" is a nice change.

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