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Demystifying Asset-Backed Commercial Paper: Opportunities, Risks and Practical Considerations

1 min read

Executive Summary

ABCP can be a good investment choice in large corporate treasury accounts due to the depth, liquidity, flexibility, and yield potential of the asset class.

ABCP gained popularity recently because increased event risk of corporate names resulted in concern about unsecured commercial paper.

A potential investor of ABCP should carefully review the strength of the sponsor bank, external support, program type, and asset collateral quality prior to investing.

The wide range of risks among different programs requires specialized credit knowledge and regular asset collateral monitoring to minimize risk.

Introduction

Created in the mid-1980s, asset-backed commercial paper (ABCP) trailed its term asset-backed securities (ABS) cousin in acceptance by fixed income investors, especially corporate cash managers. The stigma against ABCP started to change in the new millennium, when event risk of corporate names caused the unsecured commercial paper market to shrink dramatically.

Meanwhile, the increased demand by institutional investors for ABCP resulted in the proliferation of innovative ABCP structures that made it more difficult for buyers to discern the risks associated with newer programs. Many corporate cash investment policies still take a conservative stance on ABCP as eligible securities, even though well over half of the high-grade commercial paper market is ABCP.

Without delving too much into technical details, we will provide a brief introduction to ABCP, highlight some of the common advantages and risks of the traditional programs, and provide a practical guide for ABCP risk assessment. We believe ABCP are legitimate investment vehicles in large corporate treasury accounts due to the depth, liquidity, flexibility, and yield potential of the market. We also think that the wide range of risks among programs requires dedicated credit expertise and regular asset collateral monitoring when investing in ABCP.

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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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