Asset Backed Commercial Paper

  

Categories: Bonds, Accounting, Metrics

No, this term doesn't refer to an advertisement for toilet tissue (that would be Backed Asset Paper Commercial), and it doesn't designate a humorous procession up a mountain featuring bagpipes and a bunch of pastries (that would be a Comical Piper Baked Ascent, which frankly isn't even close, unless you have both dyslexia and a massive speech impediment).
Instead, this is commercial paper that has some asset providing it with collateral. Got it? No, didn't think so. We figured that definition would probably require a bit more of a break down.
First, commercial paper. Typically, this term refers to a short-term debt security. Basically, a company is borrowing money from investors and the commercial paper acts as the I.O.U. Often, this paper is unsecured, meaning that investors have no recourse if the company defaults. But the chance of default are low, because the time limit is so short. It's like your buddy borrowing 20 bucks from you to go to the movies, with the promise that he'll pay you back next week. Except it's on a corporate level, so we could be talking about millions of dollars of corporate paper.
Asset backed corporate paper goes the additional step of adding collateral. Usually, the asset back-stopping the paper is something like credit card or auto loan receivables. Since they are short-term, the maturity dates of the asset backed commercial paper are no more than 270 days.
For the issuer, selling the asset backed securities generates short-term capital to cover immediate expenses and smooth out the business cycle, similar to how companies will use a line of credit.
For investors, the prospect is usually relatively safe, because the maturity dates come soon enough that there isn't a big chance of a surprise default (hopefully, you can trust a company to stay in business for the next 9 months). Plus the investors' cash is only tied up for a brief period of time, and the interest rate is likely higher than something like a money market.

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