For those most in need of cash, short-term commercial paper would help raise enough to cover current transactions. But even this corner of the financial markets isn't as friendly as it used to be. Last week, Lucent scored that money, but at a higher cost than investment-grade debt. Now, others enduring downgrades in their bonds or commercial paper are forced to pay higher interest rates to lure in new debt holders. Most of the downgrades are hitting manufacturing and telecom companies, but some warn that financial companies, which issue the bulk of commercial paper, could soon face hard times, too.
Junk bonds are usually the last resort for fallen angels.
Because of its shorter duration, commercial paper almost always pays yields several percentage points lower than those of bonds, making it the cheapest form of debt a company can issue. So the riskier a company's financial outlook appears, the less appetizing its corporate paper becomes. Companies desperate for short-term capital can opt to pay higher interest rates, but this too has drawbacks. It eats into the company's profits and makes expenditures on new investment less attractive. When times are tough, only the most desperate are interested in borrowing - healthier companies want to wait until demand picks up.