Credit Crunch Hits Commercial Sector

RENEE MONTAGNE, host:

And anybody who got one of those subprime mortgages can tell you how painful the credit crunch is, and it's not just people with shaky credit. Now big corporations are finding it harder to borrow money.

NPR's Adam Davidson reports.

ADAM DAVIDSON: When a large corporation needs some ready cash, they don't usually go to an ATM machine or whip out a credit card. They use something called commercial paper. These are short-term bonds - really a sort of IOU - in which a company gets some cash in return for a promise to give that cash back in a few weeks along with some interest. These are enormously popular. More than $2 trillion worth of these short-term bonds are currently out. And they're normally the dullest sort of investment - extremely low risk, low return, just a notch more aggressive than a savings account.

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But suddenly investors are shying away, afraid that some commercial paper is too risky because it's backed by subprime mortgages held by the borrower. In the last two weeks, the market shrank by nearly $100 billion, the largest drop in seven years. This means that fewer investors are buying these short-term corporate bonds, forcing some companies to borrow from banks at higher interest rates.

So far the only companies greatly affected are in the finance sector. And many analysts predict that other types of businesses will find it as easy as ever to issue commercial paper.

Adam Davidson, NPR News, New York. Transcript provided by NPR, Copyright NPR.