Commercial Paper is a short-term unsecured debt issued by a company to raise finance for up to one year in the local debt market. Typically, this type of instrument is issued by banks and large corporations to cover short-term receivables and other short-term financial liabilities. Often, the issuance of a commercial bond is part of a continuous, much longer borrowing program, which can be calculated for several years (typical for Western European countries) or even be indefinite (typical for the US market). As a part of such borrowing programs, upon repayment of previously issued commercial papers, the issuer immediately issues new ones, which makes this method of financing similar to a revolving credit line.
Commercial bonds are characterized by:
• Lack of asset backing, so the obligation is guaranteed only by the overall creditworthiness of the borrower.
• Since this instrument is a money market instrument, the maturity of a commercial bond usually varies from one day to a year. Despite the generally accepted limitation of the maturity of money market securities by the upper limit of one year. Commercial bonds with maturities of up to three years are also encountered on various local debt markets (for example, El Corte Ingles, bonds issued in the Spanish market, and bonds of the Aston Group issued in the Russian market).
• Commercial bonds are issued mainly at a discount, but there are also coupon securities with a fixed rate.
• This instrument is characterized by low liquidity due to the fact that instruments are placed among a narrow circle of investors who hold the investment until maturity.
• Commercial bonds are usually placed in private subscription without prior marketing.
For the issuer, the main advantage of this method of financing is the lower cost of borrowing in view of the simplified registration procedure and therefore lower transaction costs of the issue. The disadvantage is the limited access to the issue of this type of instruments - the issuers of commercial bonds in the majority of local markets can only be large corporations with a high credit rating. For an investor, investments in commercial bonds are associated with low credit risk - a high credit rating of the issuer and a short circulation period reduce the risk of default to a minimum, on the other hand, with a relatively low yield and with a high risk of liquidity due to the absence of an active secondary market for this tool.