Commercial Papers

By Group 6
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Harsh Jigar Ushma Samyak Anushri Rohit

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Commercial Paper

It is an unsecured negotiable instrument. Alternative to bank borrowing.

Better interest rates available.

Only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. 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 without SEC {Securities & Exchange commission} regulations. Recently trend has changed to very short term Commercial Papers (<90 days).
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Commercial Paper cont.

Issuers are corporations with healthy credit rating. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Small companies can use credit support from larger companies. The longer the maturity on a note, the higher the interest rate the issuing institution must pay. Rolled over at maturity
Option to reinvest/reissue.
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Who Uses Commercial Paper

Issuers

Mostly larger corporation Very commonly used be financial institutions Most commonly used in U.S.A

Buyers
Mutual Funds Pension Funds Commercial Bank Trust Departments State and local governments Non financial corporations Dealers
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Issuance
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.

Issuance
The issuer can market the securities directly to a buy and hold investor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then sells the paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of bank holding companies. Most of these firms also are dealers in US Treasury securities. Direct issuers of commercial paper usually are financial companies that have frequent and sizable borrowing needs and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every

Use of C.P in U.S.A

At the end of 2009, more than 1,700 companies in the United States had issued commercial paper. As of 2008 October 31, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007; there was $1.7807 trillion (short-scale, or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion was "asset backed" and $979.4 billion was not; $162.7 billion of the latter was issued by nonfinancial corporations, and $816.7 billion was issued by financial corporations.
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History
Evidence supports Commercial Paper may have started as early as 1790. Marcus Goldman, founder of Goldman Sachs, got his start trading commercial paper in New York in 1869. First CP was recorded with Federal bank of NY in 1918.

International CP
Yankee Commercial Paper Samurai Commercial Paper Euro Commercial Paper

Commercial paper issued in a different currency in international money markets Different rules than US commercial paper, no SEC regulations Longer maturities (>270 days) No required banking or credit line, more risky
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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

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Defaults
Defaults on high quality commercial paper are rare, and causes concern when they occur. Some notable examples include:

On June 21, 1970, Penn Central defaulted on a debt of $77.1 million. The Federal Reserve intervened and cut Penn Central's bond rating from BBB to Bb.[8] This placed a substantial burden on clients of the issuing dealer for Penn Centrals commercial paper, Goldman Sachs. On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to $315 million. Effects were small, partly because default occurred during a robust economy. On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention in money market funds.

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Advantages of CP
1.

2.
3. 4.

High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options.

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Disadvantages of CP
Its usage is limited to only blue chip companies. 2. Issuances of Commercial Paper bring down the bank credit limits. 3. A high degree of control is exercised on issue of Commercial Paper. 4. Stand-by credit may become necessary
1.

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Ratings
Rated similar to a bond Recently bond ratings have been going down because of current market conditions

Moody's superior satisfactory adequate speculative defaulted P1 P2 P3 NP NP

S&P A1+ or A1 A2 A3 B or C D

Fitch F1+ or F1 F2 F3 F4 F5
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Current Rates

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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?

Moodys, S&P, and Fitch
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Questions Continued

Three International Commercial papers?

Yankee CP, Samurai CP and Euro CP.

Commercial Paper can be sold in the market by which two ways?

Direct Paper and Dealer Paper

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True Or False

Is Euro Commerical paper more risky?

True

Commercial Paper is not rated by credit rating agencies?

False

Smaller and less well-known companies with lower credit ratings can issue commercial paper with credit support?
True
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Questions Continued

Do you have any question to try and stump us?

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Thank You
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