# Understanding Asset-Backed Commercial Paper (ABCP) for Short-Term Investments

## What Is an Asset-Backed Commercial Paper (ABCP)?

An asset-backed commercial paper (ABCP) is a short-term investment vehicle with a [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp) that is typically between 90 and 270 days. These debts are backed by the issuing company's physical assets, such as trade receivables.

Companies use asset-backed commercial paper to fund short-term financing needs, while investors use them as a low-risk, short-term investment.

### Key Takeaways

*   Asset-backed commercial paper (ABCP) is a short-term investment with a maturity of up to 270 days.  
    
*   ABCPs are backed by collateral such as credit card payments, auto loans, or mortgages.  
    
*   The primary difference between ABCP and regular commercial paper is the collateral backing.  
    
*   ABCP interest payments come from the assets backing the security, like monthly loan payments.  
    
*   Investors should be aware of liquidity risks if the underlying assets decrease in value.

## How Asset-Backed Commercial Paper (ABCP) Works

Asset-backed commercial paper (ABCP) is a short-term money-market security that is issued by a [special purpose vehicle](https://www.investopedia.com/terms/s/spv.asp) (SPV) or [conduit](https://www.investopedia.com/terms/c/conduit-issuer.asp), which is set up by a sponsoring financial institution. The maturity date of an ABCP is set at no more than 270 days and issued either on an interest-bearing or discount basis.

The note is backed by the corporation's collateral, which might include future payments to be made on credit cards, auto loans, student loans, and [collateralized debt obligations](https://www.investopedia.com/terms/c/cdo.asp) (CDOs). These expected payments are collectively known as [accounts receivables](https://www.investopedia.com/terms/a/accountsreceivable.asp). The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions.

> **Important**
>
> A company can create an ABCP from any type of asset-backed security, including subprime mortgages, which are high-risk mortgages that were one of the main catalysts of the 2008 financial crisis.

## Comparing Commercial Paper and Asset-Backed Commercial Paper

The main difference between commercial paper (CP) and asset-backed commercial paper (ABCP) is that CP isn't backed by assets. [Commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp) (CP) is a money market security issued by large corporations to raise money to meet short-term obligations. With a fixed maturity of less than one year, the commercial paper acts as a [promissory note](https://www.investopedia.com/terms/p/promissorynote.asp) that is backed only by the high credit rating of the issuing company.

Investors purchase the commercial paper [at a discount](https://www.investopedia.com/terms/a/at-a-discount.asp) to face value and are repaid the full [face value](https://www.investopedia.com/terms/f/facevalue.asp) of the security at maturity. Since standard commercial papers are not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price. A type of commercial paper that is backed by other financial assets is called an asset-backed commercial paper.

A company or bank looking to enhance [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) may sell receivables to an SPV or other conduits, which, in turn, will issue them to its investors as asset-backed commercial paper. The ABCP is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the conduit, which is responsible for disbursing the funds generated by the receivables to the ABCP noteholders.

## How Interest Payments Are Managed in ABCPs

Throughout the investment, the sponsoring financial institution monitors developments affecting asset performance and [credit quality](https://www.investopedia.com/terms/c/creditquality.asp) in the SPV. The sponsor ensures that ABCP investors receive their interest payments and principal repayments when the security matures.

The interest payments made to ABCP investors originate from the pool of assets backing the security, e.g., monthly car loan payments. When the paper matures, the investor is paid the [principal](https://www.investopedia.com/terms/p/principal.asp), funded through asset collections, new ABCP issuance, or the credit's liquidity facility.

## Important Considerations for ABCP Investors 

While most ABCP programs issue commercial paper as their primary liability, funding sources have been extensively diversified lately to include other types of debt. This includes [medium-term notes](https://www.investopedia.com/terms/m/mtn.asp) (MTNs), extendible commercial paper, and [subordinated debt](https://www.investopedia.com/terms/s/subordinateddebt.asp) to provide credit enhancement.

One significant concern about ABCPs and related investments stems from the possibility of [liquidity risk](https://www.investopedia.com/terms/l/liquidityrisk.asp). If the market value of the underlying assets decreases, then the safety and value of the ABCP might also suffer.

It's important for ABCP investors to understand the composition of the underlying assets and how the value of those assets might be impacted by market stresses, such as a downturn in the economy. The inability in some circumstances for investors to sell their investments quickly to minimize losses is just one of the [risks associated with asset-backed commercial paper](https://www.investopedia.com/articles/bonds/08/commercial-paper.asp).