Asset Backed Commercial Paper: Get With the Program

Abstract

Asset backed commercial paper, or ABCP for short, is commercial paper that is issued by a special purpose corporation against undivided interests in corporate receivables, including retail, trade, or export receivables. Since the inception of the market in 1983, the volume of ABCP has grown to represent about 16% of the total commercial paper market. 1997 Morgan Stanley.

Securitization and Capital Structure in Nonfinancial Firms: An Empirical Investigation

“…Since securitization provides firms with access to financing, the fundamental question of interest is how securitization can reduce a firm's cost of capital as compared with traditional on‐balance‐sheet financing. Although firms and practitioners often cite the low interest cost associated with securitized debt (e.g., Stone and Zissu (), Gangwani (), and Roever and Fabozzi ()), it is not clear that creating low‐risk ABS debt can reduce a firm's weighted average cost of capital. In the absence of frictions in financial markets, creating low‐risk ABS debt should result in higher financing costs for the remainder of the firm; if all debt is fairly valued, the weighted‐average financing costs should remain unchanged (Modigliani and Miller ()).…”

“…As described by Moody's (2003), "these programs generally provide working capital financing to the sponsoring bank's corporate clients" (p. 7). According to "The ABC's of ABCP" (Société Générale (2008)), 14% of multi-seller and hybrid ABCP programs were comprised of trade receivables as of July 2007, and 61% of all ABCP was issued by multi-seller and hybrid programs. Based on $1.9 trillion of ABCP outstanding as of year-end 2006 (source: http://www.federalreserve.gov/releases/CP/), approximately $160 billion (0.61×.14×1900) of ABCP was funding trade receivables as of year-end 2006.…”