Matt Sieverson

1
Commercial Paper

•  Matt Sieverson
• Meng Vue

2
Overview

• Basics of Commercial Paper
• Regulations
• Ratings
• Risks
• Issuing Companies (GMAC)
• Dealer Paper vs. Direct Paper
• Foreign Market
• Current Trends

3
Commercial Paper

• Short-term unsecured promissory notes
• Issued by large banks and corporations with high
  credit ratings to help fund their short-term debt
  obligations
• These notes are sold in the open market at a
  discount from face value, held until maturity of
  up to 270 days, and earn interest income on the
  difference between the buy price and face value
• Usually sold in lots of 100,000 at minimum
• Cheaper alternative then borrowing from a bank

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Regulations

• Avoiding Registration with SEC
• Under Section 3(a)(3) of the Securities Act of
  1933, to be exempt from registration
• Maturity of commercial paper must be less than
  270 days
• Rollover Debt
• The proceeds from this type of financing have to
  be used to finance current assets such as
  receivables and inventories, not fixed assets
  such as plant and equipment
• Advantages
• Why?
• Issuers want to avoid registration because the
  process will be too time-consuming and expensive

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Ratings

• Each issuers commercial paper gets rated by
  Standard Poors, Moodys, and Fitch.

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Risks

• Interest Rate Risks
• Yield Curve Risks
• Credit Risks (Rollover Risks)

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Issuing Companies

• Corporate issuers are one of two groups
  financial or nonfinancial companies
• Financial companies issue around 78 of all
  commercial paper outstanding
• Captive finance companies
• GMAC by far largest issuer of commercial paper in
  United States (or used to be)
• Letter of Credit (LOC)
• Credit-supported commercial paper

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Direct vs. Dealer-placed paper

• Direct paper
• Sold by issuing firm directly to investors
• Large majority are financial companies
• Cost-effective to establish their own sales force
• Dealer paper
• Hiring the services of an agent to sell
  commercial paper
• Historically dominated by securities houses
• June 1987 Fed grants subsidiaries of bank holding
  companies permission to underwrite commercial
  paper
• Commercial banks have a road into commercial
  paper market

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Foreign Markets

• Samurai commercial paper
• Ministry of Finance approved issuance of
  commercial paper in 1987
• Yen-denominated commercial paper in Japan by
  non-Japanese entities
• Euro-commercial paper
• Paper issued and placed outside jurisdiction of
  the currency denominated
• Several differences between U.S. paper and Euro
• Longer Maturity, issue without bank backing,
  almost always dealer placed, secondary market

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Current Trends

• Subprime mortgages
• Asset-back commercial paper
• Commercial paper were held in special investment
  vehicles (SIVs)
• Federal Reserve buying paper
• Disruptions in the commercial paper market and
  the tightening of bank lending
• Drive everyday commerce for the American
  businesses
• Only buying paper with a rating at A1/P1/FI
• There is a cap

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Questions?