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?