what is an asset backed commercial paper abcp 
an asset backed commercial paper abcp is a short term investment vehicle with a maturity date that is typically between 90 and 270 days a bank or other financial institution typically issues the security itself the notes are backed by the company s physical assets such as trade receivables companies will use an asset backed commercial paper to fund short term financing needs understanding asset backed commercial paper abcp asset backed commercial paper abcp is a short term money market security that is issued by a special purpose vehicle spv or conduit which is set up by a sponsoring financial institution the maturity date of an abcp is set at no more than 270 days and issued either on an interest bearing or discount basis the note is backed by the corporation s collateral which might include future payments to be made on credit cards auto loans student loans and collateralized debt obligations cdos these expected payments are collectively known as accounts receivables the proceeds of an abcp issue is used primarily to obtain interests in various types of assets either through asset purchase or secured lending transactions a company can create an abcp from any type of asset backed security including subprime mortgages which are high risk mortgages that were one of the main catalysts of the 2008 financial crisis commercial paper cp vs asset backed commercial paper abcp the primary difference between commercial paper cp and asset backed commercial paper abcp is that commercial paper is not backed by assets commercial paper cp is a money market security issued by large corporations to raise money to meet short term obligations with a fixed maturity of less than one year the commercial paper acts as a promissory note that is backed only by the high credit rating of the issuing company investors purchase the commercial paper at a discount to face value and are repaid the full face value of the security at maturity since standard commercial papers are not backed by collateral only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price a type of commercial paper that is backed by other financial assets is called an asset backed commercial paper a company or bank looking to enhance liquidity may sell receivables to an spv or other conduits which in turn will issue them to its investors as asset backed commercial paper the abcp is backed by the expected cash inflows from the receivables as the receivables are collected the originators are expected to pass the funds to the conduit which is responsible for disbursing the funds generated by the receivables to the abcp noteholders abcp interest paymentsduring the life of the investment the sponsoring financial institution that set up the conduit is responsible for monitoring developments that could affect the performance and credit quality of the assets in the spv the sponsor ensures that abcp investors receive their interest payments and principal repayments when the security matures the interest payments made to abcp investors originate from the pool of assets backing the security e g monthly car loan payments when the collateralized paper matures the investor receives a principal payment that is funded either from the collection of the credit s assets from the issuance of new abcp or by accessing the credit s liquidity facility special considerationswhile most abcp programs issue commercial paper as their primary liability funding sources have been extensively diversified lately to include other types of debt this includes medium term notes mtns extendible commercial paper and subordinated debt to provide credit enhancement one significant concern about abcps and related investments stems from the possibility of liquidity risk if the market value of the underlying assets decreases then the safety and value of the abcp might also suffer it s important for abcp investors to understand the composition of the underlying assets and how the value of those assets might be impacted by market stresses such as a downturn in the economy the inability in some circumstances for investors to sell their investments quickly to minimize losses is just one of the risks associated with asset backed commercial paper 