Asset-Backed Commercial Paper (ABCP)

Reviewed by Bhavana | Updated on Feb 01, 2023


Definition of an Asset-Backed Commercial Paper (ABCP)

It is a short-term investment instrument with a maturity period of 90 to 270 days. Companies can use ABCP to fund short-term financing requirements. A bank, a financial institution, or a large corporation usually issues ABCPs, which are notes supported by collateral.

The collateral often comprises the expected future payments or receivables of the corporation. These receivables may include payments that the corporation expects to collect via loans it has made, such as credit card debt, residential mortgages, auto loans, or student loans.

Let Us Understand ABCP

Asset-Backed Commercial Paper (ABCP) is a short-term money market security issued by a special purpose vehicle (SPV) or a conduit formed by a sponsoring finance company. The maturity date of the ABCP shall be no more than 270 days and shall be given on a discount or interest-bearing basis.

The note is supported by a corporation's collateral, which could include future payments that need to be made on auto loans, credit cards, collateralised debt obligations (CDOs), and student loans.

These expected payments collectively are referred to as receivables. The proceeds from the ABCP issue are mainly used to gain interest in different forms of properties, either via the acquisition of assets or by secured lending transactions.

Asset-Backed Commercial Paper (ABCP) vs Commercial Paper (CP)

The main difference between CP and ABCP is that the commercial paper is not backed by any asset. CP is a money market security provided by major companies to collect funds to meet short-term obligations. With a fixed maturity of less than one year, CP acts as a promissory note, backed only by the high credit rating of an issuing firm.

Investors purchase CP at a discount of face value and repay the full face value of the security at maturity. As standard commercial papers are not supported by collateral, only companies with excellent credit ratings from a noted credit rating agency will be able to sell commercial papers at a reasonable cost.

A type of commercial paper backed by other financial assets is called an asset-backed commercial paper.

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