With a fixed maturity of less than one year, the commercial paper acts as a promissory note that is backed only by the high credit rating of the issuing company. Investors purchase the note at a discount to face value and are repaid the full face value of the security at maturity.
But, like so many other things in the finance world, " financial engineers " have taken the traditional CP market and tweaked it. CP is used as short-term vehicles for investing cash, and can be referred to as a " cash equivalents. Therefore, the perceived quality of the ABCP depends on the underlying securities.
The Good, the Bad and the Ugly. ABCP is issued by one of these nominally capitalized, bankruptcy remote conduits. There are four categories of conduits: However, the chosen conduit structure depends on the goal of the plan sponsor.
For example, the proceeds from the ABCP issuance in multi- and single-seller conduits might be used to fund new mortgage loans in the case of a mortgage finance company. With a multi-seller conduit, the asset-backed securities that are purchased to be used in the program are bought from more than one originator.
With a single seller, it is just one originator. For this reason, a multi-seller conduit provides more originator diversification and is potentially less risky.
Multi-seller programs also often employ some type of credit enhancement that helps to mitigate credit and liquidity risks.
This credit enhancement can be a cash reserve or guarantees from sponsor or third-party banks. Single-seller conduits do not usually employ the same type of credit enhancements as multi-seller conduits.
However, most single-seller conduits are extendible, so they can extend past the original maturity date if they are unable to roll the ABCP at maturity. To roll means repaying commercial paper with the proceeds from a new issuance of commercial paper.
However, the extension is not indefinite; they have to auction assets if they cannot roll on the extended deadline. In a securities arbitrage conduit, the aim of the financial sponsor is to issue ABCP as a way to receive funds to purchase term securities.
This way, they earn a spread on the rate they pay to purchasers of the ABCP lower and the return they receive on the term securities they purchased higher. Like multi-seller programs, most security arbitrage conduits have some type of third-party credit enhancement.
Many SIVs are administered by large commercial banks or other asset managers investment banks or hedge funds. They issue ABCP as a way to fund purchases of investment grade securities also to earn the spread. In contrast to a multi-seller or securities arbitrage conduit, an SIV does not employ credit enhancement, and the underlying SIV assets are marked-to-market at least weekly.
This reduction introduces liquidity risk. Why would there be liquidity concerns in this market?
All CP should be stable, safe investments, right? Well, the ABCP market is a little bit different in that its fate is tied to the value of the underlying assets.Asset Backed Commercial Paper (ABCP) is a short term debt obligation backed by specific pools of assets such as trade or credit card receivables, equipment leases, .
Asset-backed commercial paper (ABCP) is short-term debt backed by collateral. It was a contributing factor to the financial crisis.
The market for asset backed commercial paper continues to shrink, which does not bode well for the proposed SIV rescue plan. Commercial paper is short-term funding, less than days, used by corporations and even more so by financial firms.
Asset-backed commercial paper fell a further % for the week to $ bln. Overall commercial paper outstanding fell by $ bln. Total commercial paper outstanding has fallen % in one month.
Investment Research 2 | December Demystifying Asset-Backed Commercial Paper For this update to our original primer, we will provide a refresher course on the instrument and a brief history. THE ASSET-BACKED COMMERCIAL PAPER MARKET1 Introduction In recent months, problems in the US sub-prime mortgage market and the securities backed by these loans have led to a global reassessment of the risks associated with investing in structured credit products.
Asset-backed commercial paper (ABCP) markets, both overseas and in Australia.