Commercial Paper
Also known as: CP, ABCP
Corporate IOUs measured in days — how blue-chip companies borrow between bond issues and bank lines.
- Asset class
- Money markets
- Instrument type
- Unsecured short-term note
- Traded
- Dealer-placed, mostly held to maturity
- Typical users
- Corporates/banks (issuers), money funds (buyers)
BeginnerWhat is it, really?
Commercial paper is a corporation's short-term IOU: an unsecured promise to pay a fixed amount in a few days to a few months (270 days max in the US, to stay exempt from full securities registration). Like T-bills, it sells at a discount — no coupons, just the climb to face value.
Only well-rated names can play: CP buyers — mostly money-market funds — want near-zero credit risk for near-zero time. In exchange, issuers get funding cheaper and more flexible than bank loans, tapping the market daily for exactly the amounts and dates they need (payroll Friday, tax date Tuesday).
The catch is rollover risk: CP funding must be renewed constantly. In a panic, buyers simply stop showing up — which is why every CP program is backstopped by committed bank credit lines, and why CP markets are a crisis's first casualty.
IntermediateHow it works in practice
Market structure
- Tiers: A-1/P-1 ("Tier 1") paper dominates; a downgrade to Tier 2 cuts the eligible buyer base drastically — a cliff issuers manage ratings around.
- Flavours: plain corporate CP; financial CP (banks); ABCP — paper issued by conduits holding receivables/assets (the 2007 fault line, when "asset-backed" turned out to mean subprime).
- Placement: via dealers or directly (some giants run their own desks).
Pricing drivers
CP rates sit above T-bills/OIS by a spread for credit and liquidity. The CP–OIS spread is a classic stress gauge: single digits in calm, hundreds of basis points in 2008/March 2020 — both times central banks built dedicated CP purchase facilities to reopen the market.
History lesson embedded
Lehman's failure caused the Reserve Primary money fund to "break the buck" on its Lehman CP — triggering a run on money funds, and ultimately the modern regime of money-fund reform (floating NAVs, gates) and shrunken unsecured CP reliance.
AdvancedPricing & valuation
Valuation and spread anatomy
Priced as a credit-risky zero:
For Tier-1 names expected loss over 90 days is fractions of a basis point — the spread is essentially all liquidity and structure. Term structure inside CP (overnight to 270d) steepens sharply in stress as buyers shorten.
Rollover risk formalised
Issuers model funding as a renewal process with market-shutdown states; backup lines convert liquidity risk into bank commitment fees. He–Xiong-style dynamic runs: shorter maturities are individually rational but collectively run-prone — the theoretical frame regulators apply to money-like liabilities generally.
Money-fund regulatory feedback
Prime-fund reforms (2016, 2023 US; EU MMFR) shrank the natural buyer base, migrating funding to secured (repo) and term markets; each reform round visibly repriced the CP-OIS basis and bank funding structures (the FRA-OIS/CP nexus that once drove LIBOR now lives on in €STR/EURIBOR spreads).
ABCP mechanics
Conduits fund assets with maturity-mismatched paper backed by liquidity/credit enhancement from sponsor banks — analysis is of the sponsor's support obligation as much as the assets; 2007's lesson is that "fully supported" vs. "partially supported" was the entire ballgame.