Asset Backed Commercial Paper
Encyclopedia
Asset-backed commercial paper (ABCP) is a form of commercial paper
that is collateralized
by other financial assets. ABCP is typically a short-term instrument that matures between 1 and 180 days from issuance and is typically issued by a bank or other financial institution.
The institution wishing to finance its assets through the issuance of ABCP sells the assets to a bankruptcy-remote
special purpose vehicle ("SPV") or structured investment vehicle
("SIV"), created by a financial services company. The SPV/SIV issues the ABCP to raise funds to purchase the assets. This creates a legal separation between the entity issuing the ABCP and the institution financing its assets.
The financial assets that serve as collateral for ABCP are ordinarily a mix of many different assets, which are jointly judged to have a low risk of bankruptcy by a ratings agency
. However, in 2007-2008 many of these assets performed poorer than expected, making buyers much less willing to purchase ABCP.
As markets became unwilling to purchase ABCP, this caused trouble for financial institutions that had relied on sales of ABCP to obtain funds for use in longer-term investments (see Maturity mismatch). In particular, the structured investment vehicles (SIVs) set up by some commercial banks financed their longer-term, higher-yield investing through sales of ABCP. This had been very profitable when ABCP was considered safe (so that ABCP buyers accepted a low interest rate), but forced SIVs to quickly liquidate their longer-term investments, at a substantial loss, when they were no longer able to sell ABCP.
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
that is collateralized
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
by other financial assets. ABCP is typically a short-term instrument that matures between 1 and 180 days from issuance and is typically issued by a bank or other financial institution.
The institution wishing to finance its assets through the issuance of ABCP sells the assets to a bankruptcy-remote
Bankruptcy remote
Bankruptcy remote is a term that describes the relative position of one company as it relates to bankruptcy vis-a-vis others within a corporate group, whereby the insolvency of the bankruptcy remote entity has as little economic impact as possible on other entities within the group...
special purpose vehicle ("SPV") or structured investment vehicle
Structured investment vehicle
A structured investment vehicle was an operating finance company established to earn a spread between its assets and liabilities like a traditional bank...
("SIV"), created by a financial services company. The SPV/SIV issues the ABCP to raise funds to purchase the assets. This creates a legal separation between the entity issuing the ABCP and the institution financing its assets.
The financial assets that serve as collateral for ABCP are ordinarily a mix of many different assets, which are jointly judged to have a low risk of bankruptcy by a ratings agency
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
. However, in 2007-2008 many of these assets performed poorer than expected, making buyers much less willing to purchase ABCP.
As markets became unwilling to purchase ABCP, this caused trouble for financial institutions that had relied on sales of ABCP to obtain funds for use in longer-term investments (see Maturity mismatch). In particular, the structured investment vehicles (SIVs) set up by some commercial banks financed their longer-term, higher-yield investing through sales of ABCP. This had been very profitable when ABCP was considered safe (so that ABCP buyers accepted a low interest rate), but forced SIVs to quickly liquidate their longer-term investments, at a substantial loss, when they were no longer able to sell ABCP.
External links
- http://www.investopedia.com/terms/a/asset_backed_commercial_paper.asp