Commercial paper
Commercial paper (CP) is short-term, unsecured debt typically maturing within one to 364 days. It is primarily used by highly-rated corporates and financial institutions for liquidity management and working capital funding. The CP market operates almost entirely on the basis of short-term credit ratings, which differ from long-term ratings in both scale and methodology.
Short-term rating scales
The three major agencies each maintain a dedicated short-term rating scale for instruments with maturities of up to one year. These scales map broadly to the long-term scale but use different notation:
| S&P | Moody's | Fitch | Long-term equivalent (approx.) | Description |
|---|---|---|---|---|
| A-1+ | P-1 | F1+ | AA– and above | Strongest short-term capacity |
| A-1 | P-1 | F1 | A– to AA– | Strong capacity to meet short-term obligations |
| A-2 | P-2 | F2 | BBB+ to A | Satisfactory capacity |
| A-3 | P-3 | F3 | BBB– to BBB | Adequate capacity; more susceptible to adverse conditions |
| B | — | B | BB range | Speculative; significant uncertainty |
| C / D | NP | C / RD / D | B and below | Very speculative or in default |
Note that S&P's A-1 and A-2 categories can each accommodate a range of long-term ratings. An issuer rated A– long-term may receive either A-1 or A-2 short-term depending on its specific liquidity profile and financial policy.
Main commercial paper markets
- US commercial paper — the largest CP market globally, dominated by financial issuers (banks and finance companies), followed by non-financial corporates and asset-backed commercial paper (ABCP). ABCP conduits are used for trade receivables, auto loans, and other asset financing. Short-term ratings are a precondition for meaningful distribution to US money market funds, which are regulated under SEC Rule 2a-7 and face strict quality and maturity requirements.
- Euro commercial paper (ECP) — a multicurrency market centred in London, used primarily by investment-grade corporates and banks for flexible short-term funding. Maturities range from overnight to one year. Less rating-dependent than the US market but a strong short-term rating materially widens the investor base.
- NEU CP (Negotiable European Commercial Paper) — the French domestic CP market, regulated by the Banque de France, with its own documentation and transparency requirements. Open to non-French issuers.
- Sterling CP — a smaller market for UK-based issuers; typically complements an ECP programme rather than standing alone.
Back-up credit facilities
CP programmes are almost universally supported by a committed bank revolving credit facility that can be drawn if the CP market is temporarily unavailable. Rating agencies expect the back-up facility to cover the outstanding CP programme in full, and they assess the availability and terms of this facility as part of their short-term and liquidity rating assessment. A CP programme without an adequate back-up facility would typically attract a weaker short-term rating.
Typical issuers and use cases
- Large investment-grade corporates managing seasonal working capital needs.
- Financial institutions (banks, insurance companies) funding short-dated assets.
- ABCP conduits providing short-term financing for trade receivables and other assets.
- Corporates using CP as a lower-cost alternative to revolving credit drawings for short-dated liquidity needs, retaining the revolving credit as a back-up rather than a primary source.