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Asset-Backed Commercial Paper - ABCP

REVIEWED BY JAMES CHEN | Updated Feb 7, 2018

What is an Asset-Backed Commercial Paper - ABCP

An asset-backed commercial paper (ABCP) is a short-term investment vehicle with a maturity
that is typically between 90 and 270 days. The security itself is typically issued by a bank or
other financial institution. The notes are backed by physical assets such as trade receivables,
and are generally used for short-term financing needs.
BREAKING DOWN Asset-Backed Commercial Paper - ABCP
Commercial paper (CP) is a money market security issued by large corporations to raise
money to meet short-term obligations. With a fixed maturity of less than one year, the
commercial paper acts as a promissory note that is backed only by the high credit rating of
the issuing company. Investors purchase the note at a discount to face value and are repaid
the full face value of the security at maturity. Since the standard commercial papers are not
backed by collateral, only firms with excellent credit ratings from a recognized credit rating
agency will be able to sell commercial papers at a reasonable price. A type of commercial
paper that is backed by other financial assets is called an asset-backed commercial paper.

Asset-backed commercial paper (ABCP) is a short-term money-market security that is issued

by a special purpose vehicle (SPV) or conduit, which is set up by a sponsoring financial
institution. The maturity date of an ABCP is set at no more than 270 days and issued either
on an interest bearing or discount basis. The note is backed by collateral which includes
future payments to be made on credit cards, auto loans, student loans, and collateralized
debt obligations (CDOs). These expected payments are collectively known as receivables.
The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets,
either through asset purchase or secured lending transactions.

A company or bank looking to enhance liquidity may sell receivables to an SPV or other
conduit, which, in turn, will issue them to its investors as commercial paper. The commercial
paper is backed by the expected cash inflows from the receivables. As the receivables are
collected, the originators are expected to pass the funds to the conduit, which is responsible
for disbursing the funds generated by the receivables to the ABCP note holders. During the
life of the investment, the sponsoring financial institution that set up the conduit is
responsible for monitoring developments that could affect the performance and credit
quality of the assets in the SPV. The sponsor ensures that ABCP investors receive their
interest payments and principal repayments when the security matures.

The interest payments made to ABCP investors originate from the pool of assets backing the
security, e.g. monthly car loan payments. When the collateralized paper matures, the
investor receives a principal payment that is funded either from the collection of the credit’s
assets, from the issuance of new ABCP, or by accessing the credit’s liquidity facility.

While most ABCP programs issue commercial paper as their primary liability, funding
sources have been extensively diversified lately to include other types of debt, such as
medium-term notes, extendible commercial paper, and subordinated debt to provide credit
enhancement.

Related Terms
Commercial Paper
Commercial paper is an unsecured debt instrument issued typically for the financing of accounts
payable and inventories and meeting short-term liabilities. more

Commercial Paper Funding Facility - CPFF

The Commercial Paper Funding Facility was created by the Federal Reserve Bank of New York in 2008
to increase liquidity in the commercial paper market. more

Short-Term Paper
Short-term papers are financial instruments that typically have original maturities of less than nine
months. Short-term paper is typically issued at a discount and provides a low-risk investment
alternative. more