What is asset-backed commercial paper?
Asset-backed commercial paper, or ABCP, is short-term corporate debt that is made up of a bundle of loans like mortgages, credit card receivables and car loans. This debt is then resold to other investors, taking the original loans off the books of the company that first issued them. That can lead to lower lending standards because the originator of the loans doesn’t have to worry about collecting.
To feed the appetite of the growing fund industry for more commercial paper, financial companies such as Coventree and National Bank of Canada set up trusts that issue commercial paper backed by assets such as car loans, mortgages and credit-card receivables. Most of these trusts roll over a portion of their commercial paper every day.
