3.4.3 Commercial Paper
A commercial paper program is a program for the issuance and marketing of short-term notes. Commercial paper consists of notes of varying, short term maturities (no more than 270 days and generally 1 to 90 days) that are generally rolled over (paid off with the proceeds of new notes) as they mature. Commercial paper can be used as an alternative to variable rate debt by issuing the full authorized principal amount at the start of the program. More often, however, commercial paper is used as a line of credit: money is borrowed (notes are issued) when funds are needed and is repaid (notes are paid and not “rolled”) when funds for this purpose are available.
Tax exempt commercial paper is a useful financing vehicle for interim financing for the construction of capital facilities eligible to be financed on a tax exempt basis. Commercial paper notes are issued as construction costs are incurred and the notes are refunded with long term debt when construction has been completed. Taxable commercial paper can be used as interim financing for capital facilities for which tax exempt financing is not available, or for working capital. Some issuers actively engage in selecting the maturity dates of individual commercial paper notes and some issuers rely on their commercial paper dealers to manage the program to minimize interest expense.
A commercial paper program may be supported by a liquidity facility in the form of a line of credit or standby bond purchase agreement, a credit facility in the form of a letter of credit, or neither. See Section 2.3.2, Credit Enhancement and Liquidity Support. Purchasers of commercial paper require that the notes be highly rated. Only issuers with significant cash available to pay notes that cannot be “rolled” (replaced by newly issued paper) can avoid the need for a liquidity facility. Issuers with very strong credit can maintain a commercial paper program with liquidity support only. Those without very strong credit must rely on both liquidity support and credit support. Extendable commercial paper is a specialized structure where notes that cannot be rolled are extended to a 270 day maturity that is used only by a few issuers with very strong credits.
A commercial paper program also requires scale (a minimum program size of $50 million or more) and active program management. As a consequence, commercial paper programs are generally established and maintained only by large governmental entities.