Commercial PapersBy Group 61 2

Harsh Jigar Ushma Samyak Anushri Rohit

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Commercial Paper

It is an unsecured negotiable instrument. Alternative to bank borrowing. Better interest rates available.

Only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. 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 without SEC {Securities & Exchange commission} regulations. Recently trend has changed to very short term Commercial Papers (270 days) No required banking or credit line, more risky9

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 confidence10

DefaultsDefaults on high quality commercial paper are rare, and causes concern when they occur. Some notable examples include:

On June 21, 1970, Penn Central defaulted on a debt of $77.1 million. The Federal Reserve intervened and cut Penn Central's bond rating from BBB to Bb.[8] This placed a substantial burden on clients of the issuing dealer for Penn Centrals commercial paper, Goldman Sachs. On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to $315 million. Effects were small, partly because default occurred during a robust economy. On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention in money market funds.

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Advantages of CP1.

2.3. 4.

High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options.

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Disadvantages of CPIts usage is limited to only blue chip companies. 2. Issuances of Commercial Paper bring down the bank credit limits. 3. A high degree of control is exercised on issue of Commercial Paper. 4. Stand-by credit may become necessary1.

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RatingsRated similar to a bond Recently bond ratings have been going down because of current market conditions

Moody's superior satisfactory adequate speculative defaulted P1 P2 P3 NP NP

S&P A1+ or A1 A2 A3 B or C D

Fitch F1+ or F1 F2 F3 F4 F514

Current Rates

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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? Moodys, S&P, and Fitch16

Questions Continued

Three International Commercial papers? Yankee CP, Samurai CP and Euro CP.

Commercial Paper can be sold in the market by which two ways? Direct Paper and Dealer Paper

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True Or False

Is Euro Commerical paper more risky? True

Commercial Paper is not rated by credit rating agencies? False

Smaller and less well-known companies with lower credit ratings can issue commercial paper with credit support? True18

Questions Continued

Do you have any question to try and stump us?

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Thank You20