Commercial PaperCommercial PaperBy Debra Davidson and Ali Monday
Commercial PaperCommercial PaperAlternative to bank borrowing
◦ Better interest rates availableIssuers are corporations with healthy
credit ratingShort term
◦ Used to meet payroll needs, operating expenses, and current assets
◦ May not be used for fixed assets, land, buildings, or machinery
◦ Typically 1 to 270 days with most being less than 90 without SEC regulations
◦ Recently trend changed to very short term Commercial Papers
Commercial Paper cont.Commercial Paper cont.Unsecured
◦Not secured by assets but must have high credit rating
◦Small companies can use credit support from larger companies
Rolled over at maturity◦Option to reinvest/reissue
PlacementPlacementFinancial corporate companies and
nonfinancial corporate companiesDealer Paper vs. Direct Paper
◦Direct Paper: From firm to individual◦Dealer Paper: packaged and promoted
by dealers who have various yields, returns, and investment requirements Captive financial companies
Manufactures and producers Bank Related financial companies
Banks and subsidiaries Glass-Steagall Act
Independent financial companies All other companies
◦Secondary market small and not widely used
HistoryHistoryEvidence supports Commercial Paper
may have started as early as 1790Resembled short term notes
◦ Issued by merchants and shippers◦ Helped with meeting short term debt
obligations◦ Various currency values
First recorded with Federal bank of NY in 1918◦ $874 million◦ Manufactures, wholesalers, retailers,
foodstuffs, metal workers, leather, lumber, and furniture
◦ With most being Direct Paper
International CPInternational CPYankee Commercial PaperSamurai Commercial PaperEurocommercial Paper
◦Commercial paper issued in a different currency in international money markets
◦Different rules than US commercial paper, no SEC regulations
◦Longer maturities◦No required banking or credit line, more
risky◦Secondary market more active
Currency efficiencies
Asset-backedAsset-backedUnlike regular Commercial Paper that
is unsecured Asset-Backed Commercial Paper is backed by underlying assets.
Price is derived from underlying assets Created to provide more liquidity in
the market◦Banks and corporations sell off debt and
can free up more capital to invest or loan out
Fluctuates with market prices and consumer confidence
RatingsRatingsRated similar to a bondRecently bond ratings have been
going down because of current market conditions
Lowering standards for issuing
Moody's S&P Fitch
superior P1 A1+ or A1 F1+ or F1 satisfactory P2 A2 F2 adequate P3 A3 F3 speculative NP B or C F4 defaulted NP D F5
Current RatesCurrent Rates
DefaultsDefaultsEnron scandal
◦Special Purpose Vehicle companies created to hide the debt
◦Commercial Paper issued out of these companies
◦These companies are not required to be on parent companies disclosing assets/liabilities
Lehmans Brothers September 2008 mortgage crisis lead to bankruptcy
Who Uses Commercial Who Uses Commercial PaperPaperIssuers
◦Mostly larger corporation Buyers
◦Mutual Funds◦Pension Funds◦Commercial Bank Trust Departments◦State and local governments◦Non financial corporations
Round lots of 100K◦Some 25K denominations sold by
issuers
QuestionsQuestionsWhat are two features of
Commercial Paper? ◦Short term and unsecured
The SEC does not require registration of Commercial Paper with maturities less than? ◦270 days
What are the 3 credit rating companies?◦Moody’s, S&P, and Fitch
Questions ContinuedQuestions ContinuedThe principal issuers of
Commercial Paper include?◦Captive, Bank Related, and
Independent Finance CompaniesHow can Commercial Paper be
sold in the market?◦Direct Paper and Dealer Paper
Questions ContinuedQuestions ContinuedWhich is not true about
Eurocommerical paper?◦ Illiquid second market
True/False: Commercial Paper is not rated by credit rating agencies? ◦False
True/False: Smaller and less well-known companies with lower credit ratings can issue commercial paper with credit support? ◦True
Questions ContinuedQuestions ContinuedDo you have any question to try
to stump us?