Commercial paper: Difference between revisions
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A form of [[negotiable]] [[debt security]] characterised by very short [[term]] — typically up the three months maturity — and high credit rating (often AAA). There is usually a ready supply of investors ready to “[[roll]]” their [[commercial paper]] (in other words, reinvest the proceeds of a maturing commercial paper in a fresh issue from the same issuer. Commercial paper is thus seen as low risk, and usually therefore usually quite [[liquid]]. | {{a|repack|}}A form of [[negotiable]] [[debt security]] characterised by very short [[term]] — typically up the three months maturity — and high credit rating (often AAA). There is usually a ready supply of investors ready to “[[roll]]” their [[commercial paper]] (in other words, reinvest the proceeds of a maturing commercial paper in a fresh issue from the same issuer. Commercial paper is thus seen as low risk, and usually therefore usually quite [[liquid]]. | ||
This can lead [[commercial paper]] issuers to see their CP has a kind of evergreen debt facility, which it is — ''until it isn’t''. [[Commercial paper]] is not ''always'' liquid, and investors won't always roll it, as the 2007 [[credit crunch]] ably demonstrated. | This can lead [[commercial paper]] issuers to see their CP has a kind of evergreen debt facility, which it is — ''until it isn’t''. [[Commercial paper]] is not ''always'' liquid, and investors won't always roll it, as the 2007 [[credit crunch]] ably demonstrated. | ||
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Because that could — well, google “global financial crisis” to see what that could lead to. | Because that could — well, google “global financial crisis” to see what that could lead to. | ||
{{ | {{sa}} | ||
*[[Liquidity]] | *[[Liquidity]] | ||
*[[Term]] | *[[Term]] | ||
{{c|risk}} | {{c|risk}} | ||
Latest revision as of 08:42, 11 July 2023
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The Law and Lore of Repackaging
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A form of negotiable debt security characterised by very short term — typically up the three months maturity — and high credit rating (often AAA). There is usually a ready supply of investors ready to “roll” their commercial paper (in other words, reinvest the proceeds of a maturing commercial paper in a fresh issue from the same issuer. Commercial paper is thus seen as low risk, and usually therefore usually quite liquid.
This can lead commercial paper issuers to see their CP has a kind of evergreen debt facility, which it is — until it isn’t. Commercial paper is not always liquid, and investors won't always roll it, as the 2007 credit crunch ably demonstrated.
Rule for a happy, prudent life: however much it might seem like reliable long term funding, don’t assume commercial paper is reliable long term funding. Don’t use it, for example, to fund mortgage liabilities, that really are long term funding commitments.
Because that could — well, google “global financial crisis” to see what that could lead to.