Knowledge Center

This article the "Knowledge Center" states that the asset-backed commercial paper market is becoming large.   The author says the asset-backed commercial paper is too big to ignore, also become for a challenge.   First, the asset-backed commercial paper is growing in size by $145 billion five year to more than $700 billion.   The reasons behind the increase in asset-backed commercial paper; for example, it has become traditional insurance.   Commercial paper is an unsecured obligation of a company, without any assets supporting the company.   If an issuer messes up on a commercial paper, that person becomes a somebody on the bottom of the food chain.   However, in the past this wasn't a problem for commercial paper market because buyers purchased commercial paper only from highly rated issuers.   So, the commercial paper usually matures before credit quality is found out and default becomes an issue.   The money-market buyers are being hit with degeneration of their credit quality.   The author states that these quick declines has made managers less willing to sell unsecured commercial paper to many companies.   The portfolio managers view asset-backed commercial paper as an alternative.   The paper that is issued by a bankruptcy remote is used to cancel the idea of default by the seller.   Also, the assets that are involved with the purchase of commercial paper are making the deal become a lot safer.   The last reason why asset-backed commercial paper is growing is the supply and demand of commercial paper.   Because of a number of formerly top-rated companies having been lower, money market managers have less issuers in which to invest.   So, asset-backed had this voiced making asset-backed commercial paper an attractive funding in the market place.   Secondly, the asset-backed commercial paper had increased in complexity.   A couple of years ago it was easy to sell and buy asset-backed commercial paper.   In these times, the variety of assets that go into asset-backed commercial... [continues]

Read full essay