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. Since the standard commercial papers are not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price. A type of commercial paper that is backed by other financial assets is called an asset-backed commercial paper.
As a means of funding corporate working capital needs, it has become popular due to its accessibility, flexibility and reliability. At the same time it offers investors advantages over traditional commercial paper in terms of reduced credit risk.
What is asset-backed commercial paper? Commercial paper is an unsecured, short-term debt security. While the overwhelming majority of ABCP is backed by assets from financial institutions, ABCP also offers corporate borrowers an alternative means of raising funds.
ABCP is short-term debt that can be interest bearing, but is issued typically on a discount basis. From a corporate point of view, the process of issuing ABCP is similar to a term securitisation in the sense that the originator of the assets sells the assets to a special purpose vehicle SPVwhich is bankruptcy remote.
The SPV, also known as the conduit, issues commercial paper to fund the purchase of the assets. Unlike a term securitisation, ABCP conduits do not generally wind down after a few years so maturing commercial paper is repaid by new issue of commercial paper. ABCP investors face risks from the deterioration of the underlying assets, timing mismatches between cash flows from assets and repayment obligations, and the inability of the conduit to issue new CP.
In order to protect investors from these risks, ABCP programmes include various forms of credit enhancement, liquidity support and performance triggers. The granting of a short-term credit rating is dependent on the provision of a suitable form of liquidity back-stop to repay the maturing notes — commercial paper — in the event that the issuer is unable to re-issue.
Financial institutions that make more use of the ABCP market than corporates also use other structures. Single-seller conduit In a single-seller ABCP structure, a corporate is the sponsor of its own conduit.
The ABCP programme would only issue paper backed by assets that are originated from the corporate sponsor itself. This type of structure has the advantage of greater control over the costs of the programme. However, in almost all cases, corporates do not originate sufficiently large pools of assets to make the issuance of commercial paper in a single-seller conduit cost-effective.
Multi-seller conduit Conduits that issue commercial paper backed by corporate assets are generally sponsored by a bank. The multi-seller conduit enables banks to offer corporates an alternative means of receivables financing.
In a multi-seller programme the bank sponsored conduit will purchase assets from a number of corporates. The asset portfolio will be managed by a programme administrator which is typically the sponsor bank.
However, legally the conduit and the sponsoring bank will be separated. Even though the sponsor does not own the conduit, it will often retain a financial interest in the programme by providing liquidity support and credit enhancement.
ABCP conduits may invest in different asset types, which can be revolving and fluctuate in size. ABCP conduits are also not limited by a scheduled amortisation of assets and liabilities and often add new assets to the portfolio that backs the additional issuance of CP.
However, ABCP programmes rely strongly on extra liquidity provided by the sponsor to guarantee the timely repayment of CP.
The conduit sponsor will continuously add new assets to the programme to ensure sufficient volume to re-issue new CP, provided that this is in line with the operating rules governing the conduit. ABCP programmes are also associated with the following benefits: In an ABCP programme, the credit status of the seller the company raising funds is less important than the credit quality of the assets that secure the commercial paper issue.
Therefore, provided the quality of the assets that back the programme is high enough, even a borrower with a low credit rating will still have access to relatively cheaper funding.
Due to the bankruptcy-remoteness of the issuing entity, ABCP can be regarded as a slightly more reliable investment than traditional CP. The process In a multi-seller ABCP programme, the sponsor bank of the programme will set up a bankruptcy-remote conduit.
Usually the programme sponsor will initiate the creation of the programme, but not maintain an equity stake in the programme itself. This conduit will purchase assets from sellers, for example corporate borrowers, and issue commercial paper which is secured by these assets.
The CP issued under the programme is passed through the conduit in return for an interest in the assets held by it.
The assets serve as the main source of funds used to repay ABCP investors interest and principal. In particular the creditworthiness of the obligors to the seller is an important factor when credit rating agencies rate a ABCP programme, as the obligors make the payments that are the source of the asset cash flows.
This will protect investors in the event of a bankruptcy from claims on assets that have been sold to the SPV. However, in most cases the seller will continue to service the assets and report periodically on the asset performance to the conduit. Agents In addition, the ABCP conduit will enter into contractual agreements with a number of agents that assist in the administration and operation of the programme: The administrative agent — who will either be the programme sponsor, one of its subsidiaries or, in rarer cases, an independent third-party service provider — will perform all administrative tasks pertaining to the day-to-day operation of the programme eg record-keeping, issuing, selling and repaying CP and communicating with all other participants.
An issuing and paying agent IPA will take the responsibility for settlement and record-keeping of CP transactions. The programme manager appoints the board of directors, organises board meetings and provides office space and other related services.
In addition to acting as the administrative agent, the sponsor bank will often provide liquidity support and credit enhancement to the conduit.
Over-collateralisation is the main form of credit enhancement used in corporate transactions.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, . By placing itself in the position of being the primary financier of the credit risk embedded in the pool of assets funded by the asset-backed commercial paper program in terms of value the sponsor takes the position of being the primary risk bearer and thus the "primary beneficiary".
Cadwalader, Wickersham & Taft LLP practices in industries and areas such as Asset-Backed Commercial Paper. corporate financial management ASSET-BACKED COMMERCIAL PAPER Liquidity conduits DENE WHITE ASSESSES THE RESILIENCE OF ASSET-BACKED COMMERCIAL PAPER AND EXPLAINS WHY IT IS STILL AN ATTRACTIVE SOURCE OF DIVERSIFIED FUNDING FOR CORPORATES.
Recently, however, many money markets have become extremely illiquid, including the asset backed commercial paper (ABCP) markets. This program is intended to help restore liquidity to the ABCP markets and thereby to help money funds meet demands for redemption.
2. Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll), and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note.