Commercial Paper Commercial Paper

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Commercial paper Overview

For many corporations, borrowing short-term money from banks is often a labored and annoying task. Their desire to avoid banks as much as possible has led to the widespread popularity of commercial paper.

Commercial paper is typically an Commercial paper • Commercial paper trades unsecured, short-term funding option characteristics short-term credit ratings issued by a corporation, typically • Used initially to provide short-term and has varied buyers for financing accounts receivable funding for working capital 3(a)3 • Short-term ratings A1+, A1, A2, A3; and inventories. The corporation is no long-term rating required called the borrower, and buyers— • Exempt from registration and individuals or institutional, for delivery requirements • Well-established, $1.3 example—are called lenders, as • Quoted on a discount basis trillion dollar market they are funding the corporation via • Primary investors are money- the commercial paper. It is usually • Unsecured promissory note with market funds, banks, insurance issued at a discount, reflecting maturities overnight to 270 days companies, municipalities, current market interest rates. • Typical minimum denominations corporations and high- Maturities on commercial paper of $100,000 3(a)3 net-worth individuals are usually no longer than nine months, with maturities of one to • Proceeds utilized for two months being the average. current transactions Discount rate is determined on the morning of issuance For the most part, commercial • Programs rates A1+/P1 to A3/P3 • The rate is based off of a paper is a less risky investment • Appropriate for individual and spread versus LIBOR because the financial situation of institutional investors dependent a company can easily be predicted upon their investment objectives • There is no maximum rate over a few months. Furthermore, typically only companies with high Liquidity support Issued via broker-dealer or credit ratings and credit worthiness directly from the issuer issue commercial paper. Over the • Most programs are backed by past 40 years, there have only unused bank lines if commercial • Broker-dealer issues typically been a handful of cases where paper is unable to be rolled on a “best efforts” basis with no commitment to buy the paper corporations have defaulted on their • Some programs are asset- commercial paper repayment. backed commercial paper, where Commercial paper is usually issued the corporation will have lines with denominations of $100,000 of credit, liquidity support or or more. Individual investors have collateralized assets to support access to 3(a)3 commercial paper. the commercial paper

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