Collateralized Commercial Paper: A New Breed or ABCP 2.0?

“Change is the law of life. And those who look only to the past or present are certain to miss the future.”  — John F. Kennedy

Abstract

Collateralized commercial paper (CCP) made its debut last November to institutional cash investors. This new structure allows investors to purchase commercial paper from entities conducting term repos with broker-dealers. New regulatory changes for money market funds and tri-party repo markets provided logical explanations for its introduction. Some of the CCP features investors should be aware of include liquidity, maturity, and credit transformation as well as dealer funding diversification. We think the structure of CCP differs from multi-seller ABCP programs and more closely resembles repo-backed conduits. We advise investors to look to the issuer’s standalone credit, quality and terms of the asset collateral, legal and operational considerations and regulatory uncertainty before investing in specific CCP issues.

Introduction

At first it was the search for yield, then came complacency, turmoil, fear, uncertainty, and again the search for yield – for some, the corporate cash investment business has come full circle. While the auto-pilot style of treasury cash management is largely discredited today, we must ask ourselves – can the past help us identify and avoid a future crisis?
Turmoil forces change, either through human adaptation or through external forces, and it’s hard for anyone in the markets to ignore that 2010 was the year of financial regulation. Perhaps by coincident, a new type of investment called collateralized commercial paper (CCP) made its debut to institutional cash investors last November. One program does not make a trend, but since its launch, word on the Street is that several Wall Street firms are working on similar offerings, which are likely to hit the market soon.
At the time of this writing, it appears that large prime money market funds are the main investors in this new CCP. It is conceivable that, over time, other cash vehicles and separately managed accounts may invest in this newfangled money market instrument. As managers of short-duration portfolios, we wanted to share our views on it, particularly its impact on the broader corporate cash market. Considering its new nature, we are aware of the limitations of our analysis and want to advise our investors to be mindful of, and carefully evaluate, its development.
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