Answers / Corporate Treasury

Why do rating agencies and investors expect a commercial paper program to be backed by committed bank lines, and how much backup is appropriate?

A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

CP is short-dated and rolled continuously, so the issuer bears rollover risk: if the CP market freezes — a credit event or a market-wide shock — maturing paper still has to be repaid. Committed bank facilities (an RCF) provide the backstop, letting the issuer draw to redeem CP when it can't roll. Agencies typically expect near 100% backup of outstanding CP (sometimes net of very liquid assets) before assigning a top short-term rating; thin backup signals liquidity risk and pressures the rating. The cost is the commitment fee on undrawn lines, but it's the price of CP market access. The 2008 and 2020 CP freezes are the canonical reminders.

WHAT INTERVIEWERS LISTEN FOR

  • ✓CP carries rollover risk if market freezes
  • ✓RCF backstop funds redemption when CP can't roll
  • ✓Agencies expect ~100% backup for top short-term rating
  • ✓Cost = commitment fees on undrawn lines

COMMON MISTAKES

  • ✗Treating CP as permanent funding
  • ✗No backstop for outstanding CP
  • ✗Ignoring rollover/market-freeze risk

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