- corporates;
- financial institutions;
- governments;
- supranational agencies.
Commercial paper originated in the US in the nineteenth century and the US
offered a means by which large business enterprises such as the railroads could tap into
sources of capital across the US continent and internationally, at a time when US banks
were confined to single states and relatively small in terms of their capital base.
Classic commercial paper is unsecured and does not carry a bank guarantee. As a
result (except in times of economic boom) it tends to be primarily a market for ‘name’
issuers with strong cash flows and a good credit rating. The average maturity of USCP
is around 30 days, normally with a maximum of 270 days. The limit arises from the fact
that paper issued with a maturity of more than 270 days requires registration with the
US Securities & Exchange Commission (SEC) and this adds to issuance costs. In the
case of a corporate borrower the funds are typically used to finance operating costs and
working capital requirements.
USCP Quotions:
USCP is quoted on a bank discount basis in the same way as US Treasury bills, so
that the yield or return is understated by the quoted rate.
Settlement And Dealers
Settlement in the USCP market is normally the same day as purchase. Issuers often roll
over USCP on maturity— that is, they issue new paper to redeem the maturing
instruments. There is a risk that the new paper may not find enough buyers, so issuers
can arrange a standby credit line with a bank so that the funds will always be available.
Large CP issuers such as General Electric Capital Corporation (GECC) place their
paper directly with investors and employ teams of salespeople for this purpose. Issuance
fees can be very low for a large and frequent borrower, as little as one or two basis
points. However many issuers still operate through dealers who work for major Wall
Street investment banks and securities houses. The dealers may agree to buy up and
then resell the paper at a fixed price, or alternatively may agree simply to use their ‘best
endeavours’to find investors (the latter type of arrangement carries a lower fee). The
denominations of bills are normally $100,000 and above.
Many top European names have set up USCP programmes, starting with Electricite´
de France in 1974, which used the proceeds to pay for its oil requirements in US dollars.
Part of the reason for issuance in the USCP market is that domestic commercial paper
markets in Europe are as yet relatively underdeveloped, although with the advent of the
euro this may change in the years ahead.
Read More : US Commercial Paper
