By Thomas D. Jordan, President, Public Trust Advisors
Putting Paper to Pen: Commercial Paper in the Public Funds Marketplace
In our space of public funds investing commercial paper (CP) is typically viewed as a short-term investment alternative. However, CP is important because it allows corporations to meet some of their short-term obligations such as payroll or short-term fundings in a way that does not break the bank. The fact is that most of the world has in some way benefitted from CP financing -- from filling up at a gas station, eating at a restaurant or observing a public works project, you can be assured that many of your experiences have been brought to you thanks to some type of CP financing.
Traditionally commercial paper is the low-cost alternative to a traditional bank credit line. In many cases it is cheaper for corporations to rely on CP as opposed to accessing and drawing on their bank’s line of credit allowing established corporations with high credit ratings a cheaper funding source. Either way, CP can enter the marketplace through a broker, while direct CP issuers (often financial or banking companies) are able to directly access the market without using an intermediary.
Simply put, CP is akin to a home equity line of credit or a credit card designed for large financially stable companies. Sometimes these large, financially stable companies have money and sometimes they don’t, so going to the CP marketplace allows them to borrow money on a short-term basis with the understanding that it will be repaid with interest in the future.
Why is all of this important now?
CP makes a difference to corporations that fund their flow of goods & services and payrolls on a weekly/monthly/quarterly basis. It also makes a positive difference to the investors in the short-term, high quality money market arena, and when you add up all the benefits to the various sectors it is clearly good for the economy as it allows goods and services to reach consumers each and every day.
It also provides for and supports a free market economy; it is its transactional life blood. While the CP market ebbs and flows it can often be under considerable strain due to market volatility, money fund activity, and traditional investor appetites for product. Over time, and in the wake of the global financial crisis the volume of outstanding CP has been steadily reduced and now is often refinanced “daily” adding to the burden of those intermediaries that play the vital role in facilitating our free market economy.
Like any investment, there are risks, but when CP is properly understood and evaluated, a good credit team and a sound credit process can eliminate much of the risk.
To understand more about CP, and to hear more of our thoughts on the vital role it plays in our economy, please select the link below to download our free white paper “Commerical Paper (CP) De-Mystified".