Evaluating Tax-Exempt Commercial Paper
Maria C. Sazon Vice President and Senior Research Analyst AllianceBernstein
The purpose of this chapter is to set forth an analytical framework to analyze the credit risk of tax-exempt commercial paper. The discussion begins with the definition and purpose of commercial paper notes, identifies different forms of repayment methods, and proceeds to list various types of payment enhancement otherwise known as credit backstops. The chapter concludes with criteria to consider in analyzing unenhanced commercial paper.
OVERVIEW OF COMMERCIAL PAPER
Commercial paper (CP) is a short-term promissory note of an issuer (a municipal issuer or corporation) of high-credit standing, which is bought and sold in the open market. It is issued to provide working capital or interim financing. CP has a term of 30 to 120 days, or any maturity in between. The maximum term that CP can be issued is 270 days. CP programs are typically open-ended with maturities being rolled over on a regular basis. If used as an interim or bridge financing, the CP program is retired when the long-term financing has taken place, generally upon issuance of long-term bonds.
Extendible CP is similar to traditional CP with one major difference: the issuer has the option to extend the stated maturity in the event of a failed rollover or remarketing. As such, extendible CP has a maturity that could stretch beyond 270 days. An extension is not considered a default. An issuer ...