Lesson 2 of 6 · 12 min
Commercial paper, rollover risk and asset-backed CP
Strong issuers can borrow short term more cheaply by selling their own unsecured notes to investors, but because the paper is repaid with new paper, investors insist on a bank backup line in case the market shuts.
In short
- Commercial paper (CP): short-term, unsecured notes sold publicly or privately by large, highly rated issuers; corporate CP usually matures in under three months.
- Uses: working capital, seasonal cash needs and bridge financing until long-term funding is arranged.
- Maturing CP is usually repaid with new CP (rolled over), creating rollover risk; investors require a committed backup line (liquidity enhancement).
- Financial institutions issue about 60% of CP; governments and supranationals also issue. Eurocommercial paper (ECP) deals are smaller and less liquid than US CP (USCP).
- Asset-backed CP (ABCP): a bank sells loans to an SPE, which issues CP backed by the bank's liquidity line; the financing is off the issuer's balance sheet.
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