Commercial Paper

Commercial paper ‫ ف تروح تعم ل‬، ‫ فهي بالنس بالها عالي ه‬%12 ‫دلوق تي الش ركة عش ان تاخ د ق رض البن ك بيف رض عليه ا فائ دة علي الق رض عالي ه فلتكن‬
‫ دي مش بتكون بضمان‬commercial papers ‫) و ال ـ‬%10 ‫ (اللي هو اعلي من عائد البنك بالنسبة للمستثمرين البنك ممكن يكون بيديهم‬%11 ‫للمستثمرين بعائد‬
.‫ الضمان الوحيد للمستثمرين هي سمعة الشركة‬collateral ‫أي‬
- Commercial paper is an unsecured debt instrument.
- It is an alternative to costlier methods of funding (bridge financing) → i.e., interim ‫ مؤقت‬financing
until long-term financing can be arranged.
- Its maturity can range from overnight to one year as per the following :

U.S Commercial paper Euro Commercial Paper

Currency US Dollar Any Currency

Maturity Overnight : 270 days Overnight : 364 days

pure discount instrument

quoted on an add-on yield basis
Interest Issued at a discount with Nil Interest
Interest Payment + par value
payments (Bullet Bond)

Settlement T+0 T+ 2

Negotiable Can be sold to another party

- Commercial paper is usually “rolled over” by issuers → i.e., Issuers obtain the funds to pay off
maturing paper by issuing more commercial paper → The company may face rollover risk (inability
to issue new commercial paper to replace maturing paper ) due to
(1) some market events e.g., freezing (2) company specific events e.g., deterioration ‫ تدهور‬in
a company's financial position leading to a higher
required yield on a commerical paper or
undersubscription for new issue

→ issuers often maintain access to backup credit lines (backup liquidity lines or
liquidity enhancement) ‫بضمان بنكي يعني الشركة هتروح تطلع‬ (A bank's guarantee of an issuer's
commercial paper)
‫ بتاعه ا بيجي بس رعه فالش ركات س اعات م بيكونش‬maturity ‫ قص يرة االجل من يوم لح د بكتيره ا سنة فـــ ال ـ‬commercial papers ‫يع ني اي ة ؟؟ عش ان ال ـ ـ‬
‫ جديدة بعائد مختلف و تعرضها عليهم و هللا عاوزين يكملوا هيكملوا‬commercial papers ‫عندها فلوس عشان تدفع الديون دي فتعمل اية تعيد طرح‬
‫مش عاوزين فالناس اللي هتشتري هيوفروا فلوس للناس القديمة و هكذا‬
- Defaults on commercial paper have been relatively rare because :
1- issuer tries to roll over paper, investors can reassess the issuer's financial position and decide to
subscribeor not.
2- commercial paper has a short maturity.
3- Issuers do not want to lose access to such a flexible source of financing.
- Yields on commercial paper are higher than yields on short-term sovereign bonds of the same
maturity because :
1- Investors in commercial paper face credit risk, while most highly rated sovereign bonds are risk-
free.
2- Commercial paper markets are generally less liquid than short-term sovereign bond markets.

Corporate Notes and Bonds

They can differ based on :
- Coupon payment structures (e.g., fixed-rate vs. floating-rate) .
- Principal payment structures :

Bonds with a term maturity structure
Paying off is in one lump sum payment at
maturity.
Bonds with a serial maturity structure
have maturity dates → to pay off to a defined
number of bondholders each year → i.e.,
bondholders know exactly which bonds will be repaid
each year → while with a sinking fund arrangement
choosing the paid off bondholders are designated by
a random drawing
- Term to maturity structures:
Less than 5 years → short-term bonds
between 5 and 12 years → intermediate-term bonds
longer than 12 years → long-term bonds

Medium-Term Notes (MTNs)

Have a unique characteristic that Investors can select from several maturity ranges: 9 months to 1
year, more than 1 year to 18 months, more than 18 months to 2 years, and so on up to 30 years.