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Commercial Paper Commercial Paper HNW_NRG_C_Inset_Mask 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 Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested. © 2021 RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. All rights reserved. 21-36-01578_36162 (06/21).
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