What is an 'Asset-Backed Commercial Paper - ABCP'

An asset-backed commercial paper (ABCP) is a short-term investment vehicle with a maturity that is typically between 90 and 270 days. The security itself is typically issued by a bank or other financial institution. The notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs.

BREAKING DOWN 'Asset-Backed Commercial Paper - ABCP'

Commercial paper (CP) is a money market security issued by large corporations to raise money to meet short-term obligations. With a fixed maturity of less than one year, the commercial paper acts as a promissory note that is backed only by the high credit rating of the issuing company. Investors purchase the note at a discount to face value and are repaid the full face value of the security at maturity. Since the standard commercial papers are not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price. A type of commercial paper that is backed by other financial assets is called an asset-backed commercial paper.

Asset-backed commercial paper (ABCP) is a short-term money-market security that is issued by a special purpose vehicle (SPV) or conduit, which is set up by a sponsoring financial institution. The maturity date of an ABCP is set at no more than 270 days and issued either on an interest bearing or discount basis. The note is backed by collateral which includes future payments to be made on credit cards, auto loans, student loans, and collateralized debt obligations (CDOs). These expected payments are collectively known as receivables. The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions.

A company or bank looking to enhance liquidity may sell receivables to an SPV or other conduit, which, in turn, will issue them to its investors as commercial paper. The commercial paper is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the conduit, which is responsible for disbursing the funds generated by the receivables to the ABCP note holders. During the life of the investment, the sponsoring financial institution that set up the conduit is responsible for monitoring developments that could affect the performance and credit quality of the assets in the SPV. The sponsor ensures that ABCP investors receive their interest payments and principal repayments when the security matures.

The interest payments made to ABCP investors originate from the pool of assets backing the security, e.g. monthly car loan payments. When the collateralized paper matures, the investor receives a principal payment that is funded either from the collection of the credit’s assets, from the issuance of new ABCP, or by accessing the credit’s liquidity facility.

While most ABCP programs issue commercial paper as their primary liability, funding sources have been extensively diversified lately to include other types of debt, such as medium-term notes, extendible commercial paper, and subordinated debt to provide credit enhancement.

RELATED TERMS
  1. Paper Dealer

    A paper dealer is a market maker that buys and sells extremely ...
  2. Bad Paper

    Bad paper refers to unsecured short-term fixed income debt with ...
  3. Commercial Paper Funding Program ...

    A program instituted in October of 2008 that created the Commercial ...
  4. Paper Money

    The physical notes or currency of a country that is used as a ...
  5. Conduit Financing

    Conduit financing is a financing arrangement involving a government ...
  6. Paper Millionaire

    A paper millionaire is an individual who has achieved a high ...
Related Articles
  1. Investing

    An introduction to commercial paper

    Commercial paper, a type of interest collecting promissory note, is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return.
  2. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  3. Managing Wealth

    Understanding Mortgage-Backed Securities

    Find out the meaning of this popular asset-backed security and its benefits for banks and investors.
  4. Investing

    The Money Market

    The money market provides a relatively stable place to park capital that may be needed within a short time horizon.
  5. Investing

    Commercial Real Estate Faces Strong Headwinds

    The good times may be coming to an end for the U.S. commercial real estate market as mortgage defaults rise and interest rates move upward.
  6. Investing

    Will Corporate Debt Drag Your Stock Down?

    Corporate debt can mean a leg up for firms, or the boot for investors. How to tell the difference.
  7. Personal Finance

    A Good Credit Score: Why Do You Need It?

    Your credit score can affect your ability to borrow money, buy a house or even get a job.
  8. Investing

    PIMCO Report: The Case for High Yield Bonds in 2016

    Discover how PIMCO's 2015 white paper strays from the company's mission to identify investment opportunities and risks for its clients.
RELATED FAQS
  1. What are some examples of money market funds?

    Learn more about different types of money market mutual funds, including those that invest in government paper versus commercial ... Read Answer >>
  2. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  3. What is the most typical holding in an SPV?

    Learn why property-based investments are the most common kind of holding within a Special Purpose Vehicle, or SPV, and how ... Read Answer >>
  4. When did the U.S. start using paper money?

    The roots of paper money in the U.S. dates back to the 1600s in Massachusetts, when the pioneering colony printed bills and ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center