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Commercial Paper

Commercial Paper. By Debra Davidson and Ali Monday. C ommercial Paper. Alternative to bank borrowing Better interest rates available Issuers are corporations with healthy credit rating Short term Used to meet payroll needs, operating expenses, and current assets

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Commercial Paper

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  1. Commercial Paper By Debra Davidson and Ali Monday

  2. Commercial Paper • Alternative to bank borrowing • Better interest rates available • Issuers are corporations with healthy credit rating • Short 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

  3. 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

  4. Placement • Financial corporate companies and nonfinancial corporate companies • Dealer 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

  5. History • Evidence supports Commercial Paper may have started as early as 1790 • Resembled 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

  6. International CP • Yankee Commercial Paper • Samurai Commercial Paper • Eurocommercial 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

  7. Asset-backed • Unlike 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

  8. Ratings • Rated similar to a bond • Recently bond ratings have been going down because of current market conditions • Lowering standards for issuing

  9. Current Rates

  10. Defaults • Enron 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

  11. Who Uses Commercial Paper • Issuers • 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

  12. Questions • What 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

  13. Questions Continued • The principal issuers of Commercial Paper include? • Captive, Bank Related, and Independent Finance Companies • How can Commercial Paper be sold in the market? • Direct Paper and Dealer Paper

  14. Questions Continued • Which 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

  15. Questions Continued • Do you have any question to try to stump us?

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