Credit Crisis Alters Corporate Finance

One of the cornerstones of corporate finance has long been the issuance of commercial paper. Commercial paper is short-term funding device used by companies to keep the cash flow they need in order to fulfill short-term needs, such as payroll and supplies.

Commercial paper represents promissory notes that companies get from large banks and even other corporations. Commercial paper is issued for anywhere between one day and 270 days. This short-term obligation allows companies to meet needs , even if they do not immediately have the cash they need on hand.

However, the credit crisis put a serious crimp in the commercial paper market . Concerns about the financial solvency of the system created problems. Additionally, large banks — themselves teetering on the edge of insolvency — were reluctant to part with cash assets that didn’t absolutely have to part with. As a result, the commercial paper market has not been as active since the global financial crisis.

Commercial paper may no longer be a main source of short-term funding

When commercial paper became harder to come by, some companies looked for alternative means to get their short-term funding. And with the realization that they could get short-term funding from elsewhere might come a permanent drop in the commercial paper market. Indeed, this is the third consecutive week that the commercial paper market has shrunk . Even with economic indicators pointing to the fact that the economy might have reached its trough, commercial paper is not recovering .

Normally, commercial paper recovers as the economy does. Clearly, though, it is not making a recovery. And that could be an indicator of the changing face of corporate finance .

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