ABCP Conduit

Brief Definition

An ABCP (Asset-Backed Commercial Paper) conduit is a special-purpose vehicle (SPV) or entity created by a financial institution to issue asset-backed commercial paper. The conduit purchases receivables or other financial assets from various originators (such as corporations or financial institutions) and finances these purchases by issuing ABCP to investors.

Further Explanation

An ABCP (Asset-Backed Commercial Paper) conduit is a special-purpose vehicle (SPV) or entity created by a financial institution to issue asset-backed commercial paper. The conduit purchases receivables or other financial assets from various originators (such as corporations or financial institutions) and finances these purchases by issuing ABCP to investors. The funds raised from the sale of ABCP are used to pay the originators for the assets, and the cash flows from the assets are used to repay the ABCP investors.

Example:
A bank sets up an ABCP conduit to help companies finance their receivables. Several companies sell their receivables to the conduit, which then issues ABCP to investors to raise funds for these purchases. The companies get immediate cash for their receivables, and the investors receive returns from the cash flows generated by the receivables. The conduit manages the receivables, collects payments from the companies’ customers, and uses those funds to repay the ABCP investors.