Asset-Backed Commercial Paper (ABCP)
Asset-Backed Commercial Paper (ABCP) is a short-term secured money market instrument issued by corporates, banks, and other all-India financial institutions. It is issued for 90 days to 270 days to meet the short-term working capital requirements of the issuer. The unique part about this instrument is that, unlike normal commercial paper, it is secured by assets.
Understanding Asset-Backed Commercial Paper
ABCP is a money market instrument issued to meet the issuer's working capital requirements, having the tenor between 90 days to 270 days. It is backed by collateral that secures the money of the lenders who purchase such commercial papers. The assets used as collateral by the issuer can be trade receivables of the issuing entity.
The ABCP are issued at a discount independently determined by the market forces and redeemed at par. These are issued to individuals, banks, corporates, etc. The pricing of such papers is between the prevailing rate of the commercial banks and the money market rate.
Simply put, ABCP is a promissory note secured with collateral, freely transferable through endorsement and negotiable, with a fixed maturity period.
Features of Asset-Backed Commercial Papers
Difference between Commercial Paper and Asset-Backed Commercial Paper
Commercial Paper is an unsecured short-term money market instrument issued to meet the working capital requirements with a fixed maturity period. These are freely transferable and can be used as a negotiable instrument.
Asset-Backed Commercial Paper is also a short-term money market instrument that is freely transferable and can be used as a negotiable instrument with a fixed redemption period. But, it is secured by the collateral, generally the trade receivables of the issuing authority.
The typical commercial paper can have a minimum tenor of 7 days, which can go up to 1 year; in contrast, the ABCP can have a maturity period between 90 days to 270 days.
Therefore, we can infer that the ABCP is slightly different from a typical Commercial Paper; it only differs due to the presence of collateral.
Advantages of Asset-Backed Commercial Papers
Disadvantages of Asset-Backed Commercial Papers
The Bottom Line
An Asset-Backed Commercial Paper is one the most secure form of money market instrument. Unlike Commercial Paper, it is secured by the asset given by the borrower. This is the only differential element from commercial paper, making it more popular among other money market financial instruments.
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