'Commercial Paper' links

From Wikipedia:

Commercial paper is a money-market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather to purchase inventory or to manage working capital. It is commonly bought by money funds.



There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money 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. 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. Direct issuers save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper.

from Fed reserve of Richmond:

Most commercial paper has a maturity of between 5 and 45 days, with 30-35 days being the average maturity. Many issuers continuously roll over their commercial paper, financing a more-or-less constant amount of their assets using commercial paper....Backup lines of credit are intended to provide funds to retire maturing commercial paper when an event prevents an issuer from rolling over the paper. Such an event may be specific to an issuer: an industrial accident, sudden liability exposure, or other adverse business conditions that investors perceive as significantly weakening the credit strength of the issuer.

Here is the Chevron Website page that explains their 'Commercial Paper' offering....and this is the pdf-link to the 'Offering Memo'.

This is the 'Commercial Paper Rates and Outstanding Data' published daily by the Federal Reserve.

Lately, Commercial Paper has run into bad press, here is an explanation from Money Week:

The main problems are in a sub-sector of the commercial paper market known as asset-backed commercial paper (ABCP), loans backed by assets such as mortgages or credit-card debt. ABCP is mainly held in special investment vehicles (SIVs) or conduits, which are set up by banks, but crucially, are kept off the bank’s balance sheet. These SIVs issue short-term commercial paper and use the funds raised to buy assets such as mortgage-backed securities and other debt that matures over a longer period of time. The profits come from the fact that the long-term debt it buys pays a higher yield than it pays out on its commercial paper.

As these vehicles are off balance sheet, they can borrow and invest as much as they want without affecting the sponsoring bank’s ability to lend money for other reasons. This area of the market has been booming, now accounting for around $2trn of all the commercial paper outstanding, according to The Economist.

So what’s gone wrong?

Subprime mortgages. As markets belatedly realised that giving home loans to people with no incomes, job or assets was a terrible idea for anyone who cares about getting their money back, so investors in ABCP began to panic. The idea that some of the assets backing commercial paper were unsound meant that investors began to demand their money back and refused to keep rolling over the loans. This left SIVs scrabbling to find the money to repay investors.