Credit enhancement

Article Abstract:

Mid-sized corporations are beginning to issue commercial paper (an inexpensive short-term financing technique), by borrowing respected credit ratings from larger corporations and banks, for a fee. This financing technique, known as credit enhancement, provides the middle-market issuer several economic advantages over traditional financings, including: financing at 100 basis points below the prime rate, maintaining the issuer's financial confidentiality, enabling issuers to borrow less than the traditional $10 million minimum (through pooled issuances), providing access to national markets, and adding to the prestige of the issuing company. Various enhancement providers are discussed, along with the commercial paper issuances in which they were involved. The first enhanced credit transaction related to a commercial paper issue was sponsored by First National Bank of Boston.

Economic aspects, Credit management

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Rating the issue

Article Abstract:

The relationship between a firm's commercial paper (CP) rating and the Standard and Poor's (SP) rating received by its bond issues is discussed. For CP, the SP criteria include: strength of credit, liquidity considerations, and timing considerations. Examples demonstrate short-term, long-term outlooks. A backup liquidity source is needed, determined by credit strength and capital market access, provided by bank credit lines. The SP required information and documentation are: a letter request for a rating, a listing of company contact personnel with telephone numbers, identification of the commercial paper dealer, a listing of bank account credit lines (with bank personnel contacts and telephone numbers), a copy of the board of directors' authorization to issue the paper, and a legal document verifying the non-registration status of the issue.

Evaluation, Finance, Bonds, Bonds (Securities), Corporations, Corporate finance, Standard & Poor's Corp.

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