What is Fine Paper?
Fine paper can refer to high grade securities whose credit rating makes them almost risk free, or commercial paper issued by blue chip companies with a low probability of default.
- Fine paper can refer to high grade securities whose credit rating makes them almost risk free, or commercial paper issued by blue chip companies with a low probability of default.
- Fine paper usually trades at a very small spread over government-issued fixed-income securities which reflects that, though considered safe, there is still risk.
- Issuers are not required to register commercial paper with the SEC if the maturity is less than 270 days.
Understanding Fine Paper
Fine paper is commercial paper, which is short-term debt that companies issue to raise money for specific projects. Commercial paper is a type of investment offered by companies, not banks or governments. Commercial paper is similar to a bond, in that it is issued for a specific amount of time at a specific rate.
Commercial paper is an unsecured investment, because each issue is not backed by anything. If the issuing company defaults, there is nothing the investor can claim as compensation.
Commercial paper is not insured by the Federal Deposit Insurance Corporation (FDIC), and it is exempt from Securities Exchange Commission (SEC) registration requirements if the maturity does not exceed 270 days. Commercial paper typically has short durations and returns are usually much lower compared with other types of investments.
Blue-chip companies that have been in business for decades are often viewed as being solid and safe investments. As such, this means there is little risk these established companies will default on their debts, so fine paper issued by blue chips is considered an extremely safe investment. Fine paper usually trades at a very small spread over government-issued fixed-income securities.
Fine Paper and The Great Recession
In the early days of the Great Recession of 2008, banks and financial institutions were afraid to lend money to each other, resulting in a credit crunch. This affected the commercial paper market because—as unsecured investments—commercial paper was suddenly seen as significantly riskier than it had been. Fine paper was seen as risky as well.
Despite the fact that blue chip companies were the issuers of fine paper, investor confidence was shaken by the implosion of financial companies previously thought "too big to fail." After the government took steps to stabilize financial markets, eventually financial institutions began lending again and investors were able to invest in the commercial paper market once more.