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Fears grow over short-term debt

Sentinel Management freezes withdrawals. Possible defaults are seen in Canada.

August 15, 2007|From Times Wire Services

There was no break in the bad news for battered credit markets Tuesday as jitters rose over problems with short-term debt:

Sentinel Management Group Inc., an Illinois-based cash management firm for commodity trading companies, froze client withdrawals from its $1.5-billion fund after saying that credit market turmoil made it impossible to trade certain securities without incurring losses.

A Canadian credit-rating firm warned of possible defaults in that country's $100-billion-plus market for short-term, asset-backed commercial paper, as some issuers have run into trouble raising new funds.

Until last week, investor anxiety over the debt market had been focused on longer-term high-risk bonds, such as those backed by sub-prime mortgages. But on Thursday some European banks became reluctant to make short-term loans to one another because of uncertainty about the extent of holdings of sub-prime and other dicey debt.

Because financial firms depend on the availability of short-term credit, the troubles in Europe led major central banks worldwide to inject money into the banking system.

But that didn't help Sentinel.

On its website before Tuesday, the firm said it invested in "readily marketable government and corporate securities."

Yet in a letter to clients explaining its bar on redemptions, Sentinel said some securities it owned had fallen sharply in price, and "we are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value."

Eric Bloom, Sentinel's chief executive, didn't return phone calls seeking comment.

The problems at Sentinel Management caused headaches for an unrelated Vermont-based mutual fund company, Sentinel Asset Management. The company issued a news release saying it was "in no way affiliated" with the Illinois firm.

In Canada, some issuers of commercial paper -- a form of short-term borrowing -- have struggled to find buyers for new debt. DBRS, Canada's main credit-rating firm, said that 17 issuers of asset-backed commercial paper were seeking to raise cash, and that their failure to receive funding could result in defaults on outstanding paper.

On Monday, Coventree Inc., which packages commercial paper for companies looking for funding, struggled to sell new debt. On Tuesday the firm said it had placed $600 million of commercial paper, but it added that the market remained tenuous.

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