Download - Commercial Paper
Commercial Paper
July 2013
Member NYSEFINRA SIPC
Discussion Materials
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Commercial Paper Overview
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Discussion Summary
■ Commercial Paper Overview
■ Types of Commercial Paper
■ Types of Issuers
■ Available Returns
■ Investment and Policy Considerations
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Short-Term Investment Alternatives
■ NCCMT
■ Bank Deposits
■ CDs
■ Repurchase Agreements
■ T-Bills
■ Agency Discount Notes
■ Municipal Securities (Variable Rate)
■ Commercial Paper
NCCMT Holdings as of 6/30/13Investment Options
Financial CP51%
Asset-Backed CP
14%Non-Financial CP 1%
Treasury 9%
Variable Rate Municipals
8%
Agencies6%
Repurchase Agreements
11%
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Commercial Paper Overview
■ Short-term, unsecured Promissory Note
■ Primarily sold by corporations, financial institutions and foreign governments as a low cost, short-term financing vehicle
■ Access to capital without expense of SEC registration
■ Maturity is normally up to 270 days, with most issuance less than 90 days
CP Maturity DistributionOverview
1-4 days60%5-9 days
13%
10-20 days4%
21-40 days9%
41-80 days3% 81+ days
10%
Days to Maturity
Source: Federalreserve.gov
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Commercial Paper Overview
■ Issued in denominations of $100,000 or greater
■ Discount security where investor purchases notes at less than par and receives par at maturity
■ Over $1.0 trillion in commercial paper outstanding
90 Day CP Yields since 1997Overview
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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Commercial Paper Types
■ Commercial paper sold under Section 3(a)(3) of the Securities Act of 1933:
■ Must finance “current transactions” (i.e. operating expenses or current assets such as receivables and inventories)
■ Maturity must be less than 270 days
■ Issuers often elect to roll-over on a continuous basis
■ Not ordinarily purchased by general public
■ Limited Secondary Market
3(a)(3) Commercial Paper
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Commercial Paper Types
4(2) Commercial Paper
■ Commercial paper sold under Section 4(2) of the Securities Act of 1933:
■ Cannot be publicly offered (private placement)
■ Can only be sold to “Accredited Investors”
■ Intended for Institutional Investors with no planned resale
■ Security can only be sold or transferred through originating placement agent
■ No maximum maturity
■ Highly illiquid
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Selected Issuers of 3(a)3 and 4(2) CP
Issuer Industry Issuer IndustryAbbott Laboratories Consumer John Deere Capital Corp FinancialAir Products & Chemicals Basic Materials JP Morgan Chase & Co FinancialCaterpillar Inc Industrial Nestle Capital Corp ConsumerCoca-Cola Co Consumer Pepsico Inc ConsumerDeere & Company Industrial Praxair Inc Basic MaterialsDuPont Basic Materials Private Export Fund Corp FinancialEli Lilly & Co Consumer Siemens Capital Co LLC IndustrialExxon Mobil Corp Energy Svenska Handelsbank Inc FinancialIBM Corp Technology Wal-Mart Stores ConsumerIllinois Tool Works Inc Industrial Walt Disney Company CommunicationIntel Corporation Technology* Short-term ratings shown are for 3(a)(3) Commercial Paper
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Selected Risks
Sovereign RiskCompany Risk
Market RiskIndustry Risk
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Commercial Paper Issuers
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Types of Commercial Paper Issuers
CP Outstanding by Issuer TypeForeign vs. Domestic
CP Outstanding by Type (billions)Financial Domestic 289.0Financial Foreign 257.2Nonfinancial Domestic 159.9Nonfinancial Foreign 56.0Asset-Backed 271.7Total 1,033.8
Financial Domestic28%
Financial Foreign25%
Nonfinancial Domestic
16%
Nonfinancial Foreign
5%
Asset-Backed26%
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
2001
-01-
03
2002
-01-
03
2003
-01-
03
2004
-01-
03
2005
-01-
03
2006
-01-
03
2007
-01-
03
2008
-01-
03
2009
-01-
03
2010
-01-
03
2011
-01-
03
2012
-01-
03
2013
-01-
03
Foreign CP
Domestic CP
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Top Commercial Paper Programs
Select Financial Programs
■ General Electric Capital Corp.
■ Toyota Motor Credit Corp
■ Commonwealth Bk. of Australia
■ JP Morgan Chase & Co
■ Westpac Banking Corp.
■ Nordea North America
■ DNB Bank ASA
■ ING (US) Funding LLC
■ Sumitomo Mitsui Banking Corp.
■ Bank of Nova Scotia (NY)
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Top Commercial Paper Programs
Select Non-Financial Programs
■ Coca-Cola Co. (The)
■ Wal-Mart Stores, Inc.
■ Nestle Capital Corp.
■ Nestle Finance Int’l Ltd.
■ Procter & Gamble Co.
■ Chevron Corp.
■ Reckitt Benckiser Treasury Services
■ Total Capital Canada Ltd.
■ BHP Billiton Finance (USA) Ltd.
■ Johnson & Johnson
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Top Commercial Paper Programs
Select Asset Backed Programs
■ Kells Funding
■ Straight-A Funding
■ Atlantis One Funding
■ Chariot Funding
■ Jupiter Securitization
■ Old Line Funding
■ Govco
■ Alpine Securitization
■ Gotham Funding
■ Atlantic Asset Securitization
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Asset-Backed Commercial Paper
■ Issued by a conduit/special purpose entity which purchases assets or make loans backed by assets
■ Manager determines asset purchases
■ Single-seller conduit typically purchases receivables from a single entity or related group of entities
■ Multi-seller conduit purchases assets from various entities
Underlying AssetsOverview
Commercial Loans12%
Auto Loans12%
Trade Receivables
14%Government Guaranteed
Loans2%
Consumer Loans
2%Equipment
Loans2%
Floorplan Financed
2%
Equipment Leases
3%
CBO & CLO3%
Residential Mortgage Loans
4%
Auto Leases6%
Student Loans8%
Other8%
Securities11%
Credit Card Receivables
11%
Source: Moodys.com
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Asset-Backed Commercial Paper
■ Payment is supported by specific assets and/or credit enhancement
■ Individual assets often unknown by purchaser
■ More complex and less transparent than traditional commercial paper
■ Not suitable for all investors
■ Requires high level of investment experience
Underlying AssetsOverview
Commercial Loans12%
Auto Loans12%
Trade Receivables
14%Government Guaranteed
Loans2%
Consumer Loans
2%Equipment
Loans2%
Floorplan Financed
2%
Equipment Leases
3%
CBO & CLO3%
Residential Mortgage Loans
4%
Auto Leases6%
Student Loans8%
Other8%
Securities11%
Credit Card Receivables
11%
Source: Moodys.com
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$0
$500
$1,000
$1,500
$2,000
$2,500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Bill
ions
Asset-Backed
Nonfinancial CP
Financial CP
CP and the Financial Crisis
■ Volume of CP outstanding grew over 60% from $1.3 trillion to over $2.1 trillion between June 2004 and June 2007
■ Asset Backed CP more than doubled during this time period
■ Growth primarily driven due to new Asset Backed CP structures, including mortgage backed programs
CP Outstanding since 2001Overview
Source: Federalreserve.gov
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$0
$500
$1,000
$1,500
$2,000
$2,500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Bill
ions
Asset-Backed
Nonfinancial CP
Financial CP
CP and the Financial Crisis
■ Credit crisis brought upon reduction in asset valuations which led to failed asset valuation tests
■ Investors shifted from Money Market Mutual Funds invested in Asset Backed CP to those invested in treasuries
■ Over $400 billion moved from Sept. to Oct. 2008 in wake of Lehman bankruptcy
■ Federal Reserve created programs to generate liquidity for Asset Backed programs
CP Outstanding since 2001Overview
Source: Federalreserve.gov
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Investing in Commercial Paper
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Investment Considerations
■ Prime quality commercial paper bearing the highest rating of at least one nationally recognized rating service and not bearing a rating below the highest by any nationally recognized rating service which rates the particular obligation.
Investment and Policy ConsiderationsState Limitations
Type Moody's S&P FitchA-1+ F1+A-1 F1
P-2 A-2 F2P-3 A-3 F3
B BC C
Tier I P-1
Tier II
Not prime
■ Portfolio Limit
■ Individual Issuer Limit
■ Minimum Long-Term Ratings
■ Asset Backed Restrictions
■ Foreign vs. Domestic
■ Trading Characteristics
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Available Returns
Overview
■ Various Factors Impact CP Yield Including:
■ Short-Term Benchmark Rates
■ Credit Risk of Issuer
■ Rollover Risk
■ Industry of CP Issuer
■ Supply/ Demand
Comparative Yields
Source: Federalreserve.gov*Data as of July 12, 2013
0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35%
Non-Fin. A2/P2
Asset-Backed
Financial
Non-Financial
90 Day Commercial Paper Yields
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Purchasing Commercial Paper
90 Day CP Yields since 1997Direct versus Dealer Purchases
■ Direct Purchases
■ Larger financial institutions that sell a large amount of commercial paper continuously
■ Dedicated sales force internally
■ Dealer Purchases
■ Smaller financial institutions/corporations use dealers to place their commercial paper
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1997
1998
1999
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2001
2002
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2005
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2007
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2009
2010
2011
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2013
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Issuer 30 60 90 120 180 270 S&P MDYGE Capital Corp 0.050 0.090 0.130 0.150 0.220 0.240 A-1+ P-1Toyota Motor Credit 0.080 0.120 0.160 0.170 0.230 0.250 A-1+ P-1Toyota Cred Puerto Rico 0.080 0.120 0.160 0.230 0.250 A-1+ P-1Prudential Funding 0.090 0.100 0.120 0.130 0.150 0.150 A-1+ P-1Natixis US Fin Co 0.150 0.150 0.210 0.270 0.320 0.530 A-1 P-1Abbey Natl NA LLC 0.170 0.190 0.230 0.270 0.370 0.550 A-1 P-1Societe Generale NA 0.140 0.220 0.240 0.310 0.400 0.540 A-1 P-1
Intesa Funding LLC 0.280 0.410 0.470 0.510 0.670 A-2 P-2Dexia Delaware LLC 0.400 0.430 0.470 0.550 A-2 P-2
-------------Days to Maturity-------------
Selected Issuers
Source: Bloomberg – July 16, 2013
Market Yields
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Summary
Summary Summary
■ High quality commercial paper can be an effective vehicle to help portfolio diversification
■ Requires a high degree of selectivity
■ Buy and hold investment
■ Should not be relied on for liquidity needs
■ Know what you own
■ Monitor companies you invest in
■ Market is an excellent indicator of credit concerns
■ Exercise caution with unusually attractive yields
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Contact Information
James M. TraudtSenior Vice PresidentManager of Public Finance
One James Center901 E. Cary St Ste 1100Richmond VA 23219-4037(804) 697-2904 office(804) 549-4900 fax
Ty WellfordVice PresidentPublic Finance
One James Center901 E. Cary St Ste 1100Richmond VA 23219-4037(804) 697-2915 office(804) 549-4915 fax
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