Tuesday, August 25, 2009

Types of commercial paper(2)

Directly placed paper must be sold in large volume to cover the substantial costs of its distribution and marketing. On average, each direct issuer has between $600 and $700 million outstanding at any one time and will usually borrow at least $100 million per month. While issuers of direct paper do not have to pay dealer's commissions and fees, these companies must operate a marketing division to maintain constant contact with active investors. Sometimes direct issuers must sell their paper even when they have no need for funds. This is the price of maintaining a good working relationship with active investor groups. These companies also cannot escape paying fees to banks for supporting lines of credit, to rating agencies who rate their paper issues, and to agents (usually banks) who dispense required payments and collect funds.
The other major variety of commercial paper is dealer paper, issued by securities dealers on behalf of their corporate customers. Also Known as industrial paper, dealer paper is issued mainly by non-financial companies as well as by smaller bank holding companies and finance companies. The issuing company may sell the paper directly to the dealer, who buys it less discount and commission and then attempts to sell it at the highest possible price in the market. Alternatively, the issuing company may carry all the risk, with the dealer agreeing only to sell the issue at the best price available less commission (often refereed to as a best efforts basis). Finally, the open-rate method may be used, in which the borrowing company receive some money in advance but the balance depends upon how well the issue sells in the open market

No comments: