Understanding asset-backed commercial paper (ABCP)

Asset-backed commercial paper (ABCP) is a short-term debt instrument that blends traditional commercial paper with securitization features. Generally maturing in less than 397 days, ABCP is issued by a bankruptcy-remote special purpose vehicle (SPV) and is typically, but not always, backed by collateral, such as receivables or securities. Since its emergence in the 1980s, ABCP has evolved into a flexible funding tool for banks and financial institutions, offering liquidity, capital efficiency, and yield enhancement opportunities for investors.

What is ABCP and how does It work?

ABCP programs are structured to isolate risk and provide short-term funding. In a traditional setup, a bank sponsors an SPV that issues commercial paper to investors. The proceeds are used to purchase receivables or other assets from corporate clients. These receivables serve as collateral, and the structure is designed to be bankruptcy-remote, limiting investor exposure to the insolvency of the sponsor or originator. Despite the presence of assets in these types of ABCP programs, ABCP is fully reliant on the liquidity support provided from the supporting bank and is not reliant on asset performance or the liquidation of assets to repay ABCP.

Over time, ABCP has expanded beyond traditional receivables funding through bank sponsored collateralized commercial paper (CCP) programs and specialty finance companies. CCP programs are used to issue commercial paper to investors for the purpose of funding securities on the bank balance sheet. These program structures are becoming more popular in existing CCP programs and newly launched CCP programs from banks that did not previously administer a CCP program.

ABCP programs sponsored by specialty finance companies, which are often unrated, allow banks to finance securities off-balance sheet, obtain high-quality liquid assets, or hedge exposures from prime brokerage activities. The support in these programs comes from the bank performing under the obligation to provide the cash flow needed at ABCP maturity to repay investors. The flexibility of ABCP makes it a valuable tool for managing liquidity and regulatory capital.