1. Commercial Paper By Debra Davidson and Ali Monday

2. Commercial Paper Alternative to bank borrowing ◦ Better interest rates available Issuers are corporations with healthy credit rating 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 with most being less than 90 without SEC regulations ◦ Recently trend changed to very short term Commercial Papers

3. Commercial Paper cont. Unsecured ◦ Not secured by assets but must have high credit rating ◦ Small companies can use credit support from larger companies Rolled over at maturity ◦ Option to reinvest/reissue

4. Placement 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  Captive financial companies  Manufactures and producers  Bank Related financial companies  Banks and subsidiaries  Glass-Steagall Act  Independent financial companies  All other companies ◦ Secondary market small and not widely used

5. History Evidence supports Commercial Paper may have started as early as 1790 Resembled short term notes ◦ Issued by merchants and shippers ◦ Helped with meeting short term debt obligations ◦ Various currency values First recorded with Federal bank of NY in 1918 ◦ $874 million ◦ Manufactures, wholesalers, retailers, foodstuffs, metal workers, leather, lumber, and furniture ◦ With most being Direct Paper

6. International CP Yankee Commercial Paper Samurai Commercial Paper Eurocommercial Paper ◦ Commercial paper issued in a different currency in international money markets ◦ Different rules than US commercial paper, no SEC regulations ◦ Longer maturities ◦ No required banking or credit line, more risky ◦ Secondary market more active Currency efficiencies

7. 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

8. Ratings Rated similar to a bond Recently bond ratings have been going down because of current market conditions Lowering standards for issuing

9. Current Rates

10. Defaults Enron scandal ◦ Special Purpose Vehicle companies created to hide the debt ◦ Commercial Paper issued out of these companies ◦ These companies are not required to be on parent companies disclosing assets/liabilities Lehmans Brothers September 2008 mortgage crisis lead to bankruptcy

11. Who Uses Commercial Paper Issuers ◦ Mostly larger corporation Buyers ◦ Mutual Funds ◦ Pension Funds ◦ Commercial Bank Trust Departments ◦ State and local governments ◦ Non financial corporations Round lots of 100K ◦ Some 25K denominations sold by issuers

12. 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? ◦ Moody’s, S&P, and Fitch

13. Questions Continued The principal issuers of Commercial Paper include? ◦ Captive, Bank Related, and Independent Finance Companies How can Commercial Paper be sold in the market? ◦ Direct Paper and Dealer Paper

14. Questions Continued Which is not true about Eurocommerical paper? ◦ Illiquid second market True/False: Commercial Paper is not rated by credit rating agencies? ◦ False True/False: Smaller and less well-known companies with lower credit ratings can issue commercial paper with credit support? ◦ True

15. Questions Continued Do you have any question to try to stump us?