Short-term debt credit ratings
The main buyers, such as money market funds, are often restricted to having the bulk of their portfolios invested in those issues regarded as carrying a low risk of short-term vulnerability to default.
Commercial paper is often rated by the credit rating agencies, which focus on the possibility of the issuer running out of cash over the life of the paper, say 30 days, rather than the solvency of the business in the long run. Moody's has a very simple scale, with P-1, P-2 and P-3 all being investment grade and anything else being Not Prime - see Table 9.6.With Standard & Poor's, A-3 is on the cusp of investment to non-investment grade - see Table 9.7. Fitch has F1+, F1, F2 and F3 as investment grade and B, C and D for speculative grade.
Demand is very limited for lower-rated issues. Even moving from Prime-1 to Prime-2 means much greater difficulty in finding lenders - see Article 9.1.
Table 9.6 Moody's short-term debt credit ratings
| Global Short-Term Rating Scale | |
| P-1 | Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations. |
| P-2 | Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay shortterm debt obligations. |
| P-3 | Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations. |
| NP | Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories. |
Source: www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004
Table 9.7 Standard & Poor's short-term debt credit ratings
| Short-Term Issue Credit Ratings | |
| Category | Definition |
| A-1 | A short-term obligation rated ‘A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. |
| A-2 | A short-term obligation rated ‘A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. |
| A-3 | A short-term obligation rated ‘A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. |
| B | A short-term obligation rated ‘B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitments. |
| C | A short-term obligation rated ‘C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. |
| D | A short-term obligation rated ‘D' is in payment default. The ‘D' rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor's believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The ‘D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. |
Source: www.standardandpoors.com/spf/general/
RatingsDirect_Commentary_979212_06_22_2012_12_42_54.pdf
In some countries using credit rating agencies to rate CP is rare, with investors buying paper on the basis of the strength of the name of the organisation issuing it - only the largest, most well known and trusted can issue in these places.
The secondary market in CP is weak or non-existent - while dealers might be found who will buy CP from a lender, it is not easy to complete such deals and can be costly. One way of investing in it while retaining liquidity is to invest