Discussion Materials
Commercial Paper
July 2013
Member NYSEFINRA SIPC
Commercial Paper Overview
1
Discussion Summary
■ Commercial Paper Overview
■ Types of Commercial Paper
■ Types of Issuers
■ Available Returns
■ Investment and Policy Considerations
2
Short-Term Investment Alternatives
Investment Options
NCCMT Holdings as of 6/30/13
■ NCCMT
■ Bank Deposits
■ CDs
■ Repurchase Agreements
■ T-Bills
Variable Rate
Municipals
8%
Treasury
9%
■ Agency Discount Notes
■ Municipal Securities (Variable Rate)
Repurchase
Agreements
11%
Agencies
6%
Non-Financial
CP
1%
Financial CP
51%
AssetBacked CP
14%
■ Commercial Paper
3
Commercial Paper Overview
Overview
CP Maturity Distribution
Days to Maturity
■ Short-term, unsecured Promissory Note
■ Primarily sold by corporations, financial
institutions and foreign governments as a low
cost, short-term financing vehicle
■ Access to capital without expense of
SEC registration
41-80 days
3%
81+ days
10%
21-40 days
9%
10-20 days
4%
5-9 days
13%
1-4 days
60%
■ Maturity is normally up to 270 days, with
most issuance less than 90 days
Source: Federalreserve.gov
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Commercial Paper Overview
5.00
4.00
3.00
2.00
1.00
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0.00
2000
■ Over $1.0 trillion in commercial paper
outstanding
6.00
1999
■ Discount security where investor purchases
notes at less than par and receives par at
maturity
7.00
1998
■ Issued in denominations of $100,000 or
greater
90 Day CP Yields since 1997
1997
Overview
5
Commercial Paper Types
3(a)(3) Commercial Paper
■ Commercial paper sold under Section 3(a)(3) of the Securities Act of
1933:
■ Must finance “current transactions” (i.e. operating expenses or
current assets such as receivables and inventories)
■ Maturity must be less than 270 days
■ Issuers often elect to roll-over on a continuous basis
■ Not ordinarily purchased by general public
■ Limited Secondary Market
6
Commercial Paper Types
4(2) Commercial Paper
■ Commercial paper sold under Section 4(2) of the Securities Act of
1933:
■ Cannot be publicly offered (private placement)
■ Can only be sold to “Accredited Investors”
■ Intended for Institutional Investors with no planned resale
■ Security can only be sold or transferred through originating
placement agent
■ No maximum maturity
■ Highly illiquid
7
Selected Issuers of 3(a)3 and 4(2) CP
Issuer
Abbott Laboratories
Air Products & Chemicals
Caterpillar Inc
Coca-Cola Co
Deere & Company
DuPont
Eli Lilly & Co
Exxon Mobil Corp
IBM Corp
Illinois Tool Works Inc
Intel Corporation
Industry
Consumer
Basic Materials
Industrial
Consumer
Industrial
Basic Materials
Consumer
Energy
Technology
Industrial
Technology
Issuer
John Deere Capital Corp
JP Morgan Chase & Co
Nestle Capital Corp
Pepsico Inc
Praxair Inc
Private Export Fund Corp
Siemens Capital Co LLC
Svenska Handelsbank Inc
Wal-Mart Stores
Walt Disney Company
Industry
Financial
Financial
Consumer
Consumer
Basic Materials
Financial
Industrial
Financial
Consumer
Communication
* Short-term ratings shown are for 3(a)(3) Commercial Paper
8
Selected Risks
Company Risk
Sovereign Risk
Industry Risk
Market Risk
9
Commercial Paper Issuers
10
Types of Commercial Paper Issuers
Foreign vs. Domestic
CP Outstanding by Issuer Type
1200.0
1000.0
800.0
Asset-Backed
26%
600.0
Foreign CP
400.0
Financial Domestic
28%
Domestic CP
200.0
2013-01-03
2012-01-03
2011-01-03
2010-01-03
2009-01-03
2008-01-03
2007-01-03
2006-01-03
2005-01-03
2004-01-03
2003-01-03
2002-01-03
2001-01-03
0.0
Nonfinancial
Foreign
5%
Nonfinancial
Domestic
16%
Financial Foreign
25%
CP Outstanding by Type (billions)
Financial Domestic
289.0
Financial Foreign
257.2
Nonfinancial Domestic
159.9
Nonfinancial Foreign
56.0
Asset-Backed
271.7
Total
1,033.8
11
Top Commercial Paper Programs
Select Financial Programs
■ General Electric Capital Corp.
■ Toyota Motor Credit Corp
■ Commonwealth Bk. of Australia
■ JP Morgan Chase & Co
■ Westpac Banking Corp.
■ Nordea North America
■ DNB Bank ASA
■ ING (US) Funding LLC
■ Sumitomo Mitsui Banking Corp.
■ Bank of Nova Scotia (NY)
12
Top Commercial Paper Programs
Select Non-Financial Programs
■ Coca-Cola Co. (The)
■ Wal-Mart Stores, Inc.
■ Nestle Capital Corp.
■ Nestle Finance Int’l Ltd.
■ Procter & Gamble Co.
■ Chevron Corp.
■ Reckitt Benckiser Treasury Services
■ Total Capital Canada Ltd.
■ BHP Billiton Finance (USA) Ltd.
■ Johnson & Johnson
13
Top Commercial Paper Programs
Select Asset Backed Programs
■ Kells Funding
■ Straight-A Funding
■ Atlantis One Funding
■ Chariot Funding
■ Jupiter Securitization
■ Old Line Funding
■ Govco
■ Alpine Securitization
■ Gotham Funding
■ Atlantic Asset Securitization
14
Asset-Backed Commercial Paper
Overview
Underlying Assets
■ Issued by a conduit/special purpose entity
which purchases assets or make loans backed
by assets
Credit Card
Receivables
11%
Securities
11%
Commercial
Loans
12%
Auto Loans
12%
■ Manager determines asset purchases
■ Single-seller conduit typically
purchases receivables from a single
entity or related group of entities
■ Multi-seller conduit purchases assets
from various entities
Other
8%
Trade
Receivables
14%
Student Loans
8%
Auto Leases
6%
Residential
Mortgage Loans
4%
CBO & CLO
3%
Equipment
Leases
3%
Floorplan
Financed
2%
Government
Guaranteed
Loans
2%
Consumer
Loans
2%
Equipment
Loans
2%
Source: Moodys.com
15
Asset-Backed Commercial Paper
Overview
Underlying Assets
■ Payment is supported by specific assets
and/or credit enhancement
Credit Card
Receivables
11%
■ Individual assets often unknown by purchaser
■ More complex and less transparent than
traditional commercial paper
■ Not suitable for all investors
■ Requires high level of investment experience
Securities
11%
Commercial
Loans
12%
Auto Loans
12%
Other
8%
Trade
Receivables
14%
Student Loans
8%
Auto Leases
6%
Residential
Mortgage Loans
4%
CBO & CLO
3%
Equipment
Leases
3%
Floorplan
Financed
2%
Government
Guaranteed
Loans
2%
Consumer
Loans
2%
Equipment
Loans
2%
Source: Moodys.com
16
CP and the Financial Crisis
Overview
CP Outstanding since 2001
■ Volume of CP outstanding grew over 60%
from $1.3 trillion to over $2.1 trillion
between June 2004 and June 2007
$2,500
■ Asset Backed CP more than doubled
during this time period
$1,500
■ Growth primarily driven due to new Asset
Backed CP structures, including mortgage
backed programs
Asset-Backed
$2,000
Nonfinancial CP
Billions
Financial CP
$1,000
$500
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Federalreserve.gov
17
CP and the Financial Crisis
Overview
CP Outstanding since 2001
■ Credit crisis brought upon reduction in asset
valuations which led to failed asset valuation
tests
$2,500
■ Investors shifted from Money Market Mutual
Funds invested in Asset Backed CP to those
invested in treasuries
$1,500
■ Over $400 billion moved from Sept. to
Oct. 2008 in wake of Lehman
bankruptcy
■ Federal Reserve created programs to generate
liquidity for Asset Backed programs
Asset-Backed
$2,000
Nonfinancial CP
Billions
Financial CP
$1,000
$500
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Federalreserve.gov
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Investing in Commercial Paper
19
Investment Considerations
State Limitations
Investment and Policy Considerations
■ Prime quality commercial paper bearing the
highest rating of at least one nationally
recognized rating service and not bearing a
rating below the highest by any nationally
recognized rating service which rates the
particular obligation.
■ Portfolio Limit
■ Individual Issuer Limit
■ Minimum Long-Term Ratings
■ Asset Backed Restrictions
■ Foreign vs. Domestic
Type
Moody's
Tier I
P-1
Tier II
P-2
P-3
Not prime
S&P
A-1+
A-1
A-2
A-3
B
C
Fitch
F1+
F1
F2
F3
B
C
■ Trading Characteristics
20
Available Returns
Overview
■ Various Factors Impact CP Yield Including:
■ Short-Term Benchmark Rates
■ Credit Risk of Issuer
■ Rollover Risk
■ Industry of CP Issuer
■ Supply/ Demand
Comparative Yields
90 Day Commercial Paper Yields
Non-Financial
Financial
Asset-Backed
Non-Fin. A2/P2
0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35%
Source: Federalreserve.gov
*Data as of July 12, 2013
21
Purchasing Commercial Paper
Direct versus Dealer Purchases
■ Direct Purchases
90 Day CP Yields since 1997
7.00
6.00
■ Larger financial institutions that sell a
large amount of commercial paper
continuously
5.00
4.00
3.00
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.00
1999
■ Smaller financial
institutions/corporations use dealers to
place their commercial paper
1.00
1998
■ Dealer Purchases
2.00
1997
■ Dedicated sales force internally
22
Selected Issuers
Market Yields
Market Yields
-------------Days to Maturity------------Issuer
30
60
90
120
180
270
GE Capital Corp
0.050 0.090 0.130 0.150 0.220 0.240
Toyota Motor Credit
0.080 0.120 0.160 0.170 0.230 0.250
Toyota Cred Puerto Rico 0.080 0.120 0.160
0.230 0.250
Prudential Funding
0.090 0.100 0.120 0.130 0.150 0.150
Natixis US Fin Co
0.150 0.150 0.210 0.270 0.320 0.530
Abbey Natl NA LLC
0.170 0.190 0.230 0.270 0.370 0.550
Societe Generale NA
0.140 0.220 0.240 0.310 0.400 0.540
Intesa Funding LLC
Dexia Delaware LLC
0.280 0.410 0.470
0.400 0.430 0.470
0.510 0.670
0.550
S&P MDY
A-1+
P-1
A-1+
P-1
A-1+
P-1
A-1+
P-1
A-1
P-1
A-1
P-1
A-1
P-1
A-2
A-2
P-2
P-2
Source: Bloomberg – July 16, 2013
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Summary
Summary
Summary
■ High quality commercial paper can be an
effective vehicle to help portfolio
diversification
■ Know what you own
■ Requires a high degree of selectivity
■ Monitor companies you invest in
■ Market is an excellent indicator of credit
concerns
■ Buy and hold investment
■ Should not be relied on for liquidity needs
■ Exercise caution with unusually attractive
yields
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Contact Information
Jam es M. T raudt
Senior V ice President
Manager of Public Finance
T y Wellford
V ice President
Public Finance
One James Center
901 E. Cary St Ste 1 1 00
Richmond V A 2321 9-4037
(804) 697 -2904 office
(804) 549-4900 fax
One James Center
901 E. Cary St Ste 1 1 00
Richmond V A 2321 9-4037
(804) 697 -291 5 office
(804) 549-491 5 fax
jtraudt@inv estdav enport.com
twellford@inv estdav enport.com
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