The paper still needs the revolver behind it, and the commitment fee on the undrawn backstop takes most of the headline saving.
On an average need of $200 million, funding through a commercial paper programme costs an illustrative 5.19 per cent all-in against 5.56 per cent for drawing the revolver, a saving of $0.74 million a year. That is about a third of the saving the headline rates suggest, because the paper is quoted on a discount basis and still needs the revolver behind it, fully undrawn and paying its commitment fee.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The comparison treasurers get wrong is the obvious one: CP at 4.20 per cent against a revolver at SOFR plus 125 basis points, a gap of 1.05 points, so $2.10 million a year on $200 million. Three adjustments take most of that away, and below a certain programme size they turn the answer round.
| Input | Value |
|---|---|
| Committed revolving facility | $300m |
| Average short-term funding need over the year | $200m |
| SOFR (held flat for the year) | 4.00% |
| Revolver drawn margin | 1.25% |
| Commitment fee on undrawn amounts, as a share of the margin | 35% |
| Revolver upfront fee, amortised over 5 years | 0.30% |
| 90-day CP discount rate | 4.20% |
| Dealer fee on CP outstanding, per year | 0.05% |
| Rating agency fees, per year | $0.25m |
| Issuing and paying agent, per year | $0.05m |
The structural assumption is the one that matters: rating agencies and investors expect a CP issuer to hold committed bank lines covering the paper outstanding. Here the whole $300 million revolver stands behind the programme, so moving to CP does not let the company cancel the facility. It only moves the $200 million from drawn to undrawn.
CP is sold at a discount: at 4.20 per cent for 90 days the investor pays 98.95 for 100. The cost on the cash actually received is
Yield = d ÷ (1 − d × t ÷ 360) = 4.20% ÷ (1 − 4.20% × 90 ÷ 360) = 4.2446%
Excel: =0.042/(1-0.042*90/360). The 4.5 basis points between the two are real money on a rolling programme.
Drawn: $200m × (4.00% + 1.25%) = $10.5000m
Undrawn: $100m × 0.4375% = $0.4375m (the commitment fee is 35% of the 1.25% margin)
Upfront fee: 0.30% × $300m = $0.90m over 5 years = $0.1800m
Total $11.1175m, or 5.559% on $200m.
Interest: $200m × 4.2446% = $8.4891m
Dealer fee: $200m × 0.05% = $0.1000m
Backstop commitment fee: $300m undrawn × 0.4375% = $1.3125m
Upfront fee on the backstop: $0.1800m
Rating agency and paying agent: $0.3000m
Total $10.3816m, or 5.191% on $200m.
| Line | Revolver | CP programme |
|---|---|---|
| Interest on the $200m | 10.5000 | 8.4891 |
| Dealer fee | 0 | 0.1000 |
| Commitment fee on undrawn lines | 0.4375 | 1.3125 |
| Upfront fee, per year | 0.1800 | 0.1800 |
| Rating and paying agent | 0 | 0.3000 |
| Total | 11.1175 | 10.3816 |
| All-in rate on $200m | 5.56% | 5.19% |
The CP programme wins by $0.7359 million, 36.8 basis points on the amount funded. The naive comparison promised $2.10 million. The difference is the higher commitment fee on the now undrawn backstop, the discount-to-yield conversion, the dealer fee and the fixed costs of being a rated issuer.
Each dollar moved from the revolver to CP saves the drawn rate, gives back the commitment fee it no longer avoids, and pays the CP yield and dealer fee: 5.25% − 0.4375% − 4.2446% − 0.05% = 0.518 per cent, or 51.8 basis points. The fixed $0.30 million of rating and agency costs must be covered first, so the break-even average balance is $0.30m ÷ 0.518% = $57.9 million.
| Average need, $m | Revolver | CP | Saving from CP | Revolver all-in | CP all-in |
|---|---|---|---|---|---|
| 25 | 2.696 | 2.866 | −0.171 | 10.78% | 11.46% |
| 50 | 3.899 | 3.940 | −0.041 | 7.80% | 7.88% |
| 100 | 6.305 | 6.087 | 0.218 | 6.31% | 6.09% |
| 150 | 8.711 | 8.234 | 0.477 | 5.81% | 5.49% |
| 200 | 11.118 | 10.382 | 0.736 | 5.56% | 5.19% |
| 300 | 15.930 | 14.676 | 1.254 | 5.31% | 4.89% |
The all-in rates at small balances look absurd because the whole facility's fees fall on a small drawing. That is the point: the facility is a fixed cost of liquidity, and the question is only which route funds the marginal dollar more cheaply.
| CP discount rate | CP yield | CP route, $m | Saving from CP, $m |
|---|---|---|---|
| 4.10% | 4.142% | 10.177 | 0.940 |
| 4.20% | 4.245% | 10.382 | 0.736 |
| 4.40% | 4.449% | 10.790 | 0.327 |
| 4.60% | 4.654% | 11.200 | −0.082 |
| 4.80% | 4.858% | 11.609 | −0.492 |
The advantage disappears at a discount rate of 4.56 per cent, about 56 basis points over SOFR. In a market dislocation CP spreads can move further and faster than that, and paper may not roll at all. The programme is then refinanced by drawing the backstop, which is the reason the backstop exists.
A CP programme pays when the average balance is comfortably above the point where its fixed costs are recovered, here $57.9 million, and when the treasurer accepts that the saving will vanish in exactly the weeks the company most needs funding. The commitment fee mechanics are in how a commitment fee is calculated on a revolver, and the liquidity workbooks for the book's case are on the Treasury Management companion page.
Rating agencies and CP investors expect committed bank lines covering the paper outstanding, because paper that cannot be rolled must be repaid within days. In the illustrative case the full $300m facility backs the programme, so moving $200m to CP raises the commitment fee bill from $0.4375m to $1.3125m a year. That backstop cost is part of the price of CP.
Divide the discount rate by one minus the discount rate times days over 360. A 4.20 per cent discount rate on 90-day paper gives 4.20% ÷ (1 − 4.20% × 90 ÷ 360) = 4.2446 per cent, because the issuer receives only 98.95 for every 100 it repays. Comparing the raw discount rate with a loan rate understates the CP cost by 4.5 basis points here.
Big enough for the per-dollar saving to cover the fixed costs. In this case each dollar moved from the revolver saves 51.8 basis points after the extra commitment fee, CP yield and dealer fee, against $0.30m a year of rating and paying agent costs, so the average balance must exceed $57.9m. At a $25m average the CP route costs $0.171m more.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: corporate finance, valuation and markets → · All 1614 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.