Credit crunch raises borrowing costs for companies

— -- Companies are getting a taste of how the credit crunch is making it more costly to borrow.

Yields on corporate bonds jumped again Thursday as investors were less willing to lend and demanded bigger yields. The Merrill Lynch U.S. Corporate Index jumped, showing companies must pay on average a record 4.4 percentage points above interest rates on comparable government debt. That's up from 3.3 percentage points a week ago and 1.6 percentage points a year ago.

Soaring debt costs, including for the biggest and best-known companies, are a clear sign how a subprime mortgage problem that first hit the housing and finance sectors has spread and is affecting many companies' ability to borrow and grow.

Hopes for a government fix-it plan for the financial system sparked a late-day 410-point, 3.9%, rally in the Dow Jones industrials to 11,020. That helped relieve fears in the bond market, too, pushing yields back down on some companies' bonds. Still, credit crunch fallout is showing up in:

•Soaring costs for the highest-regarded companies. So-called investment-grade companies are having to pay interest rates equal to what junk bond issuers paid a year ago, says Preston Peacock of Merrill Lynch's global bond indexes group.

•Devastating interest rates for lower-rated companies. Borrowing costs faced by low-rated companies are approaching record levels, Peacock says. The difference between the rate junk bond issuers are paying and comparable-term Treasuries is 9.83 percentage points, based on the Merrill Lynch U.S. High Yield index, which is nearing the all-time high of 11.2 percentage points on Oct. 10, 2002, amid the Enron scandal. "This is squeezing the lower end and the companies that need the cash most," says Diane Vazza of Standard & Poor's.

•Less available short-term borrowing. The commercial paper market, a popular venue for big companies to borrow cash on a short-term basis, shrank $52.1 billion to $1.76 trillion the week ended Sept. 17, the Federal Reserve says. It was the biggest pullback this year, says Tony Crescenzi of Miller Tabak.