Extendable Commercial Paper, also known by its acronym XCP, represents a promissory note that is unsecured and comes with a set maturity date which can not be longer than 270 days. This paper is also a money market form of security that major corporations issue and sell to raise funds for their short term needs, such as payroll obligations. The paper is backed by a corporate promise to pay back the face value on date of maturity, which the note itself specifies. Alternatively it could be secured by the bank which issues it.
Because these instruments do not carry any collateral backing, it is only those companies that boast of phenomenal credit ratings from at least one of the principal credit ratings agencies which are able to sell such extendable commercial paper for a reasonable rate. Companies commonly sell this debt instrument at a face value discount. It usually comes with a lesser interest rate than would a comparable bond. This is because of the lesser maturity dates inherent with the rules surrounding commercial paper (they must all be under 270 days in maturity to be extendable commercial paper).
In general, the greater amount of time till maturity on any given note, the greater the interest rate will be required of the institution. Though such interest rates do go up and down according to conditions in the market, they are usually less than the rates which banks pay.
Such extendable commercial paper is called extendable simply because it is issued in an open ended fashion within the United States as part of American companies’ ongoing rolling programs. In Europe by contrast, these programs are typically a predetermined and set number of years in length.
By the end of the year 2009, over 1,700 different firms within the U.S. were issuing extendable commercial paper. As of month-ending October in 2008, the American Federal Reserve announced that the end of 2007 seasonally adjusted figures demonstrated that a total of $1.78 trillion worth of all forms of commercial paper existed. Of this amount, $979.4 billion of it did not have any assets backing it as extendable commercial paper. Financial companies were issuing $816.7 billion worth of it while $162.7 billion was from non-financial entities.
In the rest of the world outside of the U.S., the next most significant commercial paper market is the Euro-Commercial Paper Market. This market boasts more than $500 billion worth of outstanding paper. These instruments are mostly denominated in Euros, pound sterling, and U.S. dollars.
The history of commercial paper and credit dates back over a century. Promissory notes from companies and corporations have been around since at least the 1800s. In that century, now legendary Goldman Sachs founder Marcus Goldman began his career in trading commercial paper in 1869 in the city of New York.
The whole point of extendable commercial paper is that it does not have to be monitored by the Securities Exchange Commission because the maturities on these obligations are under their targeted 270 days. Companies get around this by using continuous commercial paper arrangements. These renew and replace the maturing commercial paper for as many times as necessary to provide for the corporate obligations. Otherwise, the companies would be forced to file registration statements of the instruments with the SEC. This would cause higher costs for the offerings and lead to lengthy delays.
Two methods exist for extending this commercial paper into markets. Issuers are able to sell the securities right to money market funds and other buy and hold investors. Besides this, they can offload the paper to a commercial paper dealer who will then sell the paper on to the market on their behalf. Dealer fees typically run five basis points, which amounts to $50,000 in fees for every $100 million they issue.