Asset-backed commercial paper (ABCP) is a type of short-term debt instrument that is backed by a
pool of assets. The assets that back ABCP can be a variety of types, including
receivables, loans, or
leases.
ABCP is issued by a special purpose vehicle (
SPV), which is a legal entity that is set up specifically to issue ABCP. The SPV typically borrows money from investors by selling ABCP. The SPV then uses the money to purchase the assets that will back the ABCP.
ABCP is typically issued with a maturity of less than one year. The interest rate on ABCP is typically lower than the interest rate on other short-term debt instruments, such as Treasury bills. This is because ABCP is considered to be a safer investment, as the assets that back ABCP provide a source of repayment for the debt.
ABCP is a popular investment for institutional investors, such as money market funds and pension funds. ABCP is also a popular investment for corporations, which use it to finance short-term working capital needs.
There are a number of risks associated with ABCP, including:
-
Credit risk: The credit risk of the underlying assets is transferred to the investors. If the borrowers default on their loans, the investors will lose money.
- Interest rate risk: The value of ABCP can be affected by changes in interest rates. If interest rates rise, the value of ABCP will fall.
- Liquidity risk: ABCP may be difficult to sell, especially in times of market turmoil.
Despite the risks, ABCP can be a valuable investment for institutional investors and corporations. When used properly, ABCP can help to improve the efficiency of the financial system and provide investors with access to a wider range of assets.
Here are some of the key features of asset-backed commercial paper:
- Short-term debt instrument: ABCP is a short-term debt instrument, with a maturity of less than one year.
- Backed by assets: ABCP is backed by a pool of assets, such as receivables, loans, or leases.
- Issued by a special purpose vehicle: ABCP is issued by a special purpose vehicle (SPV), which is a legal entity that is set up specifically to issue ABCP.
- Popular investment for institutional investors: ABCP is a popular investment for institutional investors, such as money market funds and pension funds.
- Popular investment for corporations: ABCP is also a popular investment for corporations, which use it to finance short-term working capital needs.