Unprecendented government action is beginning to thaw credit markets. Commercial paper is being traded again. But this credit crisis is far from over, says William Patalon III. The trickle of finance will only reach top-grade companies. The weak will either go bankrupt or be swallowed up by their healthier rivals.

This from Money Morning:

Although bank-to-bank loan rates fell for the sixth-straight day yesterday (Monday) – decreasing fears that the corporate-lending market was going to seize up – a new reality has emerged: As the song says, “only the strong will survive.”

Strong companies will navigate the uncertainties of the markets in the months and years go come; weaker players will falter, fall into bankruptcy, and get gobbled up by larger, more-healthy companies.

“This is unequivocally, absolutely, positively” the new reality, says R. Shah Gilani, a retired hedge-fund manager and Money Morning contributing editor who has emerged as a top expert on the global credit crisis. “And the unspoken reason is that even after the credit crisis has been alleviated, it will not be over.”

If the credit markets continue to improve as they have been over the past week or so, then the more-creditworthy companies should discover that loans are easier to get, and carry a lower interest rate, to boot. As Money Morning has been reporting, the London Interbank Offered Rate (LIBOR) – a benchmark rate for short-term loans – has been dropping. Yesterday, LIBOR for three-month dollar loans fell for the sixth straight day, declining 0.36 percentage points to reach 4.06%.

The recent decline in LIBOR — which establishes lending costs for individuals and for businesses — reflects a growing trust in the financial sector after governments around the world have guaranteed billions of dollars worth in bank debt and have also unveiled plans under which they will buy stakes in weak and foundering banks.

“The general economy was weakening, and that weakening has taken a turn for the worse,” Robert DiClemente, an economist at Citigroup Inc. (NYSE:C), told The Associated Press. “And any company that was already facing more-challenging business conditions, when they’re confronted by tighter credit, it gives them one less degree of flexibility.”

LIBOR Lessons

The LIBOR decrease has helped ease some investor demand for U.S. Treasury bills – considered the ultimate in safe investments. The yield on the three-month T-bill surpassed 1.0% for the first time in nearly two weeks, rising to 1.12% yesterday from 0.82% late Friday.

The U.S. Treasury Department auctioned $25 billion in three-month bills at a discount grate of 1.25%, up from 0.50% last week, and another $26 billion in six-month bills at a discount rate of 1.80%, up from 1.10% last week, The AP reported. Those higher rates for short-term government debt suggest “continued healing in the credit markets,” Tony Crescenzi, an analyst with Miller Tabak & Co. LLC., wrote in a research note to clients yesterday.

As investment funds slowly take money out of safe assets, they are turning to assets that carry a bit more risk – presumably for a better return.

Indeed, Miller Tabak’s Crescenzi noted that yesterday’s mortgage-backed securities market signaled “increased risk taking.”

And the market for commercial paper — the unsecured debt that companies sell for short-term financing — continued to improve. Commercial paper rates were generally down 0.20 to 0.40 percentage points for key issuers tapping the market Monday, including American Express Co. (NYSE:AXP), General Electric Co. (NYSE:GE), HSBC Finance (ADR: HBC), AT&T Corp. (NYSE:T) and The Coca-Cola (NYSE:KO), Kevin Giddis, managing director of fixed income at Morgan Keegan & Co. Inc., told The AP.

Just a few weeks ago, even stronger companies like AT&T were having trouble selling paper for longer than overnight. Now, investors are starting to step in and buy paper with 30-day and 60-day maturities, Morgan Keegan’s Giddis said. On Oct. 27, the Federal Reserve is scheduled to start buying commercial paper from issuers that can’t find buyers in the market. 

Against this still-slightly-uncertain credit-market backdrop, companies are going out of their way to broadcast their financial strength – and ability to be financially flexible – to the capital markets.

For instance, engineering-and-construction giant The Shaw Group Inc. (NYSE:SGR) said it was able to amend its credit facility so it can use up to $200 million as collateral for letters of credit. Trucking company Werner Enterprises Inc. (NASDAQ:WERN) emphasized that it is a “debt-free company.” And U.S. toymakers Mattel Inc. (NYSE:MAT) and Hasbro Inc. (NYSE:HAS) both underscored they have little debt on their books and have plenty of cash available.

Even so, both Werner and Mattel conceded that they may feel the credit-crisis pinch – albeit indirectly – because so many of their suppliers and customers have not been able to obtain financing of their own.

Source: Although Bank-to-Bank Loan Rates Fall for the Sixth Straight Day, Only the Strong Will Survive