Tuesday, August 25, 2009

Possible disadvantages of issuing commercial paper

Despite the advantages, there are some risks for corporations that choose to borrow frequently in the commercial paper market. One of these is the risk of alienating banks whose loans might be needed when a real emergency develops. The paper market is highly volatile and sensitive to financial and economic problems. This fact was demonstrated quite convincingly in 1980when Chrysler financial, the finance-company subsidiary of Chrysler Corporation, was forced to drastically cut back its borrowings in the commercial paper market due to the widely publicized troubles of its parent company. At times, it is extremely difficult even for those companies in sound financial condition to raise funds in the paper market at reasonable rates of interest. It helps to have a loyal and friendly banker available to supply emergency credit when the market turns sour. Another problem lies in the fact that commercial paper cannot be paid off at the issuer‘s discretion but generally must remain outstanding until it reaches maturity. In contrast, many bank loans permit early retirement without penalty.

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