An increasing amount of commercial paper is beingissued inbook-entry form whereby entries in computerized accounts are replacingthephysical commercial paper certificates. Book-entry systems willeventuallycompletely replace the physical printing and delivery of notes. TheDepositoryTrust Company (DTC), a member of the U.S. Federal Reserve System, alimited-purpose trust company under banking law and aregisteredclearing agency with the Securities and Exchange Commission, a clearingcooperative operated by member banks, began in September 1990converting mostcommercial paper transactions to book-entry form.
The financial issuer category also includessecurities firmsand insurance firms. Securities firms issue commercial paper as alow-cost alternative to other short-term borrowings such as repurchaseagreements and bank loans, and they use commercial paper proceeds tofinance a varietyof security broker and investment banking activities. Insurancecompaniesissue commercial paper to finance premium receivables and operatingexpenses.
Notes must be of a type not ordinarily purchasedby thegeneral public. In practice, the denomination of commercial paper islarge:minimum denominations are usually $100,000, although face amounts aslow as$10,000 are available from some issuers. Typical face amounts areinmultiples of $1 million, because most investors are institutions. Issuerswill usually sell an investor the specific amount of commercial paperneeded.
Bank lending to commercial and industrial companies began a steep decline atthe end of the first quarter, and, for the past 13 weeks, it declined at anannualized 8% rate, according to data from Fuji Futures. Companies whose cashflow has been reduced by the weakened economy face hurdles in turning to theirbanks for help. Reduced cash flow may put these companies in violation ofcertain performance standards that banks require to maintain credit lines, evenas banks are become more risk averse, raising the chance they won't extend newlines.
Commercial paper is typically a discount security,similarto Treasury bills. The investor purchases notes at less than face valueandreceives the face value at maturity. The difference between thepurchase priceand the face value, called the discount, is the interest received ontheinvestment. Commercial paper is, occasionally, issued as aninterest-bearingnote by request of investors. The investor pays the face value and, atmaturity, receives the face value and accrued interest. All commercialpaperinterest rates are quoted on a discount basis.
arranged two core advanced funding vehicles to accomplish this
- Synthetic Commercial Paper (TARN) and Real Estate Sale
Synthetic Commercial Paper (TARN)
A broad swath of companies -- automotive-parts suppliers, constructioncompanies, broadcasters, retailers and transportation businesses -- face thetougher commercial-paper market looking more vulnerable than they did justmonths ago. Hurt by the economic slowdown, their cash flow is shrinking. And"lower cash flow gives rise to a whole new round of concerns," saysGeorge Meyers, senior credit officer for Moody's Investors Service.
It isn't always clear which companies are most vulnerable. Balance sheets maybe misleading because commercial-paper obligations aren't always reported."If there are long-term bank lines backing up the commercial paper, then itdoesn't show up under current liabilities," says Carol Levenson, founder ofGimmeCredit, a Chicago research boutique.
Even before Sept. 11, issuance in the commercial-paper market was becoming aproblem for second-tier companies. As of late September, there was $75 billionof commercial paper outstanding for second-tier companies, down from ahigh-water mark of $145 billion last year according to Federal Reserve data. Theshrinkage has been accompanied by widening between the rates paid by top-ratedborrowers and second-tier credits. Top-tier issuers were paying 2.54% for 30-daycommercial paper the first week of October, while second-tier issuers paid 15%more, or 2.92%. In contrast, during the first week of September, first-tiercompanies paid 3.50% and second-tier ones, 3.67%, a difference of just 5%.
It worked. Because short-term rates fell further than long-term rates thisyear, especially during recent months, the strategy of shifting to shorter-termdebt paid off. Dependence on the short-term corporate IOUs known as commercialpaper could save a company treasurer as much as $50 million annually in interestcompared with the cost of issuing $1 billion in debt in the bond market.
Commercial paper is a short-term unsecuredpromissory notematuring in less than 270 days issued by banks for a fee on behalf ofcorporationsand other borrowers to raise funds from investors with idle cash. Commercial paper is a low-cost alternative to bank loans. Issuers areable toefficiently raise large amounts of funds quickly and without expensiveSecurities and Exchange Commission (SEC) registration by selling paper,eitherdirectly or through independent dealers, to a large and varied pool ofinstitutional buyers. Competitive, market-determined yields innoteswhose maturity and amounts can be tailored to specific needs, can beearned byinvestors in commercial paper. Commercial paper is usuallyissued indenominations of $100,000 or more. Therefore, smaller investors canonly investin commercial paper indirectly through money market funds or indirectlythroughtheir pension funds.
They found that : a) countries with greater growth prospects get more short-term credit; b) short-term credits are usually meant to finance countries with significant trade deficits; c) higher levels of external indebtedness are generally coupled with higher levels of short-term indebtedness to commercial banks; and d) country-specific factors affect the volume of short-term lending to a country.