This morning I was teaching my son his "times tables".
The relevance of Alphabets.
A, B, C, we are told are the first three alphabets in the English language.
So, the most important alphabets for most people in finance is M, P, S, B, ESOP. Sadly, this M is seeping its way into everything we do in life - and in all economic activity.
People will happily maximise M and use any alphabet to get there: it could be selling you a useless mutual fund (F for Fund distributors - now challenged by SEBI's desire to put an end to this malpractice) or bring you a useless real estate stock to buy at the highest price (I for IPO). AB + CP = ABCP
ABCP is actually a combination of two very simple concepts. The first concept recognises that companies need to borrow money for short periods of time, say 90 days, to run their businesses.
From this money Dayal Motors pays back the money it borrows for what is known as "working capital". Because it needs money on a continuous basis - to build the next car and truck and wait for the next buyer to pay for it in the dealer's showroom - the company has a Commercial Paper (CP) program. It is a pogram because there is a continuous need for money. The people who lend money to Dayal Motors may change but the company needs that Rs 100 crores on tap at all times. It issues a certificate (paper) saying, “Dayal Motors agree to pay you back Rs 100 crores”. Nothing wrong with that. Companies need CP to keep their factories running - money here is the liquid oil that keeps the economy humming. The next simple concept is collateral. This is a security. If Dayal Motors wishes to borrow money via a CP, the person lending that money says, "Hey, Mr Dayal, I know you are a nice guy with a nice business and people will buy your ZoomZoom cars but what if something happens and a new, zoomier car comes out, and people stop buying your car? Or if I need my money back and no one else is willing to lend you that money? That piece of paper is pretty worthless so how about giving me some security, some collateral, against this Rs 100 crore CP? Dayal Motors in all its wisdom tells the lender of the money. "What if I give you this land at my Thane factory? It is worth Rs 100 cores but some real estate developer is bound to get funded by some adventurous FII and they will pay Rs 300 crores for it - so you are safe." And the alphabet soup of ABCP is born.
Now every time a ABCP is created, there is a fee generated. To the bank who arranges the loan and to the rating agency that confirms that the loan is “safe” and assigns a risk level to the loan.
...Stay tuned to see how ABCP could affect the Indian stock markets... Archives of The Honest Truth:
Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
|
FEEDBACK: WRITE TO AJIT | TERMS OF USE |