Commercial PaperSlide 2Commercial Paper cont.PlacementHistoryInternational CPAsset-backedRatingsCurrent RatesDefaultsWho Uses Commercial PaperQuestionsQuestions ContinuedSlide 14Slide 15Commercial PaperCommercial PaperBy Debra Davidson and Ali MondayCommercial PaperCommercial 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 PapersCommercial 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/reissuePlacementPlacement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 usedHistoryHistory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 PaperInternational CPInternational 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 efficienciesAsset-backedAsset-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 confidenceRatingsRatingsRated similar to a bondRecently bond ratings have been going down because of current market conditionsLowering standards for issuingCurrent RatesCurrent RatesDefaultsDefaults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 bankruptcyWho Uses Commercial Who Uses Commercial PaperPaper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 issuersQuestionsQuestions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 FitchQuestions ContinuedQuestions 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 PaperQuestions ContinuedQuestions 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? ◦TrueQuestions ContinuedQuestions ContinuedDo you have any question to try to stump