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Rates Rise With Y2K Awareness

By John M. Berry and Tim Smart
Washington Post Staff Writers
Thursday, September 2, 1999; Page A1

Major corporations, some foreign countries and even the U.S. Treasury have begun to raise enormous amounts of cash just in case something goes wrong somewhere as computer calendars flip over to 2000 from 1999 on Jan. 1. And these preparations already are boosting U.S. interest rates across the board, analysts said.

The borrowers say they are rushing to sell many billions of dollars of debt now, not because they fear a computer-glitch catastrophe but rather because they fear that investors will worry such a catastrophe might occur and therefore won't buy securities sold near the end of the year.

There is no panic in the market, as there was a year ago after the Russian government defaulted on part of its debt. Instead, the markets are functioning well, but with some participants acting as if they expect a panic later.

This flood of debt is boosting the interest rates the issuers have to pay to attract buyers. That, in turn, raises rates on many other types of business and consumer loans. Meanwhile, many lenders and investors are pulling their money out of developing-country markets, where significant year-end computer problems are considered much more likely.

"When it comes to raising money in the capital markets, it's prudent to avoid the last few weeks of this year and the first few weeks of next year," said Thomas Capo, senior vice president and treasurer of automaker DaimlerChrylser, which raised $4.5 billion through a bond issue last month. "Why take what is probably a very small amount of risk?"

"Corporations are striving to raise cash so they don't have to rely on financial markets late in the year," said Mickey Levy, chief economist at Bank of America in New York. "It is across the spectrum" in terms of different types of securities and creditworthiness of the borrowers.

For example, GE Capital, the financial services unit of General Electric Co., said it has arranged special credit lines with its bankers similar to a special borrowing facility the Federal Reserve has set up for commercial banks faced with unusual demand for loans from their customers. Sources said GE Capital's credit line is in the "billions" of dollars.

Spokeswoman Mary Horne would not provide details of the new loan arrangement with GE Capital's bankers, but sources said it will provide GE Capital -- the world's largest issuer of short-term commercial debt -- with access to additional capital from Nov. 1 to April 7. The money will be available only for extraordinary circumstances, such as GE Capital being unable to sell any of the $8 billion to $10 billion worth of short-term debt it normally rolls over on any given trading day.

Meanwhile, the Treasury Department announced last month that it wants to have about $80 billion in cash on hand at the end of December, about twice the normal amount. A fourth of that is a consequence of a new law directing Treasury to have $20 billion on hand to advance to the National Credit Union Administration, the federal regulator of credit unions, if such institutions themselves need cash at the end of the year.

The Treasury wants the other extra funds "to provide for the possibility that the timing of receipts and outlays do not follow historical patterns," explained Gary Gensler, undersecretary for domestic finance. "We do not anticipate any problems, but we believe it is appropriate to be prepared."

The Y2K -- shorthand for year 2000 -- problem stems from the fact that many older computers and software use only two digits for the year in their calendars; when the number moves to "00," it will be treated as 1900 rather than 2000. Older systems could fail to work, as would the functions they control -- say, providing electric power.

Federal regulators say virtually all U.S. banks, thrifts and credit unions are "Y2K compliant" -- ready for the new year. European banks are also in good shape, as are institutions even in some emerging countries, Federal Reserve officials say.

Nonetheless, some lenders and investors may fear that Y2K disruptions could hurt borrowers' ability to repay their debt around the end of the year. That possibility is likely to roil financial markets in December and January and make it both more difficult and more costly to raise money at that time.

These concerns have already disrupted some financial markets. In Japan, few investors are willing to buy government bond futures contracts that expire in December.

At the same time, some foreign money is leaving Mexico, and officials there are concerned over whether adequate financing will be available later this year because of Y2K fears. U.S. Federal Reserve officials confirmed that their Mexican counterparts have sought assistance in maintaining U.S. commercial bank lines of credit to Mexican banks for the rest of the year.

The amount of foreign cash available to emerging markets is "the lowest I have ever seen it in 15 years of being involved these markets," said one hedge fund manager, who asked not to be named.

One reason for the intense preparations is the experience of last year after Russia's default, when for a time it became almost impossible to issue new debt either in the United States or elsewhere. Investors, suddenly reminded about the risk inherent in many investments, unloaded all kinds of debt securities and flocked to the safest of all, newly issued U.S. Treasuries.

Markets all over the world became highly "illiquid" -- that is, sellers frequently couldn't find buyers for many types of securities. Some markets essentially ceased to function.

That episode "showed the potential for illiquidity," said David Olsen, who runs the corporate bond syndication desk at J.P. Morgan. "It really served to focus people's attention."

So major corporations are leaving nothing to chance.

"We just really need to make 150 percent sure we have [cash] lined up for scenarios A, B, C, D, E and F," said GE Capital's Horne. "Banks are the only source of guaranteed liquidity, given their access to the Fed."

Telecommunications giant AT&T has made similar preparations; it conducted two private placements totaling $5 billion in one-year debt in July and August.

Similarly, Ford Motor Co. went to market in July with a record $8.6 billion bond sale, which analysts said was sized in part to avoid having to go back for more later in the year.

Now, bond market experts say, the pace of new debt issues in the United States, which typically picks up after the August vacation lull, is accelerating faster than normal.

"Our sense is the pickup in September will be an abnormal one," said Brad Tank, who manages bond funds for the Strong family of mutual funds.

At the same time, analysts said bond mutual funds have been encouraging firms to issue debt that won't mature until next spring so the funds won't get stuck with debt issues maturing at year-end, which could be difficult to replace.

In addition, "there is a demand from money-market mutual funds to buy paper of one year because they don't want to be in the market in December," DaimlerChrysler's Capo said.

© 1999 The Washington Post Company

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