Matt Sieverson
Meng Vue
 Basics of Commercial Paper
 Regulations
 Ratings
 Risks
 Issuing Companies (GMAC)
 Dealer Paper vs. Direct Paper
 Foreign Market
 Current Trends
 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
 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
 Each issuer’s commercial paper gets rated by Standard
& Poor’s, Moody’s, and Fitch.
Moody’s
S&P
Fitch
Superior
P1
A1 + or A1
F1 + or F1
Satisfactory
P2
A2
F2
Adequate
P3
A3
F3
Speculative
NP
B or C
F4
Defaulted
NP
D
F5
 Interest Rate Risks
 Yield Curve Risks
 Credit Risks (Rollover Risks)
 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
 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
 Samurai commercial paper
 Ministry of Finance approved issuance of commercial
paper in 1987
 Yen-denominated commercial paper in Japan by nonJapanese 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
 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