Asset-backed Commercial Paper (ABCP)

Brief Definition

Asset-Backed Commercial Paper (ABCP) is a short-term investment vehicle with a maturity typically between 90 and 270 days, backed by physical assets or other financial assets. These assets can include receivables, loans, or other cash-flow-generating assets.

Further Explanation

Asset-Backed Commercial Paper (ABCP) is a short-term investment vehicle with a maturity typically between 90 and 270 days, backed by physical assets or other financial assets. These assets can include receivables, loans, or other cash-flow-generating assets. The ABCP is issued by a financial institution or a special purpose vehicle (SPV) to finance the purchase of these underlying assets. Investors in ABCP receive the interest generated by the underlying assets, which helps provide liquidity and funding to the issuers.

Example:
A company sells its receivables (money owed by customers) to a special purpose vehicle (SPV). The SPV then issues ABCP to investors to raise money to pay the company for the receivables. The investors buy the ABCP, and the SPV uses the cash from receivables to pay interest to these investors. If the SPV has receivables worth $10 million and issues ABCP for the same amount, the investors will be paid back from the cash flows generated by these receivables.