Asset Backed Commercial Paper
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An Asset Backed Commercial Paper (ABCP) is a short term debt issued for a period of no more than 9 months or 270 days (although most ABCP are repaid after 120 to 180 days). An asset backed commercial paper is issued on discounts or interest to attract investors. ABCP is exempted from the Securities Act of 1933.[br]
The exemption may be a result of three clauses of the Act:
Section 3(a)3: This clauses states that any security with a maturity not exceeding nine months need not be registered.
Section 4(2): This clause states that any security that is sold to accredited investors and is not a public offering is exempted.
Section 3(a)2: ABCP is also exempt from registration if it is fully supported by a bank guarantee.
Asset Backed Commercial Paper: Purpose
The liquidity achieved through asset backed commercial papers is used to invest in various assets and the interest accrued is the profit for the issuing bodies. Generally, ABCPs are not issued at higher discounts to keep the profits at the maximum with the least risk. Most commonly, the conduits managing the ABCP invest in the following options:
· Trade receivables
· Consumer debt receivables
· Auto and equipment loans
· Collateral debt obligations
Financing can also take the form of traditional asset purchase or even secured lending. An asset backed commercial paper conduit may also invest in other money market vehicles, such as securities, government bonds and CPs issued by other entities. Some may even finance unsecured corporate loans.
The purpose of asset backed commercial papers is to create more liquidity, which can be invested in other money market products to generate higher revenues than what is paid back.
Difference Between Asset Backed Commercial Paper and CP[br]
The underlying difference between an asset backed CP and a general CP is its collateral protection. Although for the beginners, an asset backed commercial paper may sound less risky, the fact remains that both entail similar kinds of risks. An ASCP, even with the collateral, cannot assure repayments in weaker markets. The reason for this is the financing mechanism that invests in money market products, thus not minimizing the risk by investing in a diversified portfolio.
