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Commercial Paper Program Summary
One of the primary purposes of commercial paper (CP) is to serve as a source of interim financing. A
commercial paper program is established with a maximum size and the University can issue short term
debt under the program up to the maximum size. Benefits of CP programs include:
1. Enables projects to be financed as needed rather than waiting for a critical mass of projects to be
bond financed.
2. Provides low cost bridge financing for pledge receipts.
3. Limits negative arbitrage during the construction period for projects.
4. Enables the System to opportunistically roll commercial paper or seek long‐term take‐out
financing options based on market conditions.
5. Short‐term tax‐exempt rates are, on average, the lowest cost of funds. The System has
substantial surplus liquidity to absorb short‐term interest rate volatility and any unexpected
redemptions.
6. If the System can issue taxable commercial paper, also provides an additional source of funds for
working capital purposes and projects that do not qualify for tax‐exempt financing.
Commercial paper programs are common at most large universities. Among public universities, the
University of Virginia, the University of North Carolina‐Chapel Hill and Rutgers, the State University of
New Jersey, are just a few that have commercial paper programs.
Commercial paper is a form of non‐committed variable rate debt and therefore carries a degree of
interest rate and liquidity risk. Historically, issuers have had access to the commercial paper market
even during periods of financial market volatility such as occurred in 2008.
Implementation Process
We estimate that the System can launch a commercial paper program in approximately 90 days.
1. Determine the program size. The program size determines the maximum amount of commercial
paper that can be outstanding at any one time. The System should consider all potential uses of
the commercial paper – however remote – in determining the size since the System has no
obligation to issue the maximum amount.
2. Demonstrate sufficient liquidity to support the program. Like the System’s variable rate demand
bonds, investors and rating agencies require that the System have sufficient liquidity to redeem
any outstanding commercial paper in the event it cannot be rolled over or refinanced. Given the
System’s currently significant liquidity reserves this is unlikely to be an issue. The System only
needs to demonstrate sufficient liquidity for the amount of outstanding commercial paper (not
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the program size). Setting limits on how much paper can mature on any given day can further
mitigate liquidity requirements.
3. Obtain ratings. The System will need to obtain commercial paper ratings for the program in a
process similar to obtaining a rating for any variable rate bond transaction.
4. Select a dealer. The large bulge bracket firms that are active in the commercial paper market are
the optimal choice. Selection can be based on an RFP basis.
5. Draft Offering Circular and Launch Program. An offering circular would be prepared and the
program typically launched when the System is ready to issue its first tranche of commercial
paper.
Mechanics of Commercial Paper Program
Once the program is established, the System would notify its Dealer of the timing and amount of a draw
on the program. The Dealer would market the new tranche of paper to investors and identify pricing
levels based on maturity. Commercial paper can have maturities of 1‐270 days. Based on relative
attractiveness along the yield curve and the timing of any planned redemptions or take‐out financing,
the Dealer and System would agree on the rate and maturity of the paper. Upon maturity of the paper,
the System would redeem it with internal funds, refinance it with fixed rate bonds or other structures, or
roll it over into a new tranche of commercial paper.
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