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Commercial Paper Forward Supply Contracts
Generally, the highest yielding investment for construction funds
and debt service reserve funds today is a commercial paper forward
supply contract ("CP FSC"). CP FSCs are provided by rated
banks and broker dealers and will generate higher yields than repurchase
agreements. A CP FSC is a commitment to deliver commercial paper
that matures on or before the date that funds are needed, generally
monthly for construction funds and semiannually for debt service
reserve funds. The commercial paper is priced to yield the pre-determined
rate for the life of the deal. As funds are needed, the commercial
paper purchase for the next period is reduced by the amount of
funds drawn from the construction or reserve fund.
The commercial paper that is subject to the agreement must be
rated typically at least A1, P1 and will be sold to the trustee.
It is interesting to note that the investment purchased is the
commercial paper; the forward supply contract is merely the mechanism
by which the commercial paper is purchased. Therefore, this arrangement
is permitted if the definition of permitted investments includes
commercial paper.
Since the commercial paper that is delivered for construction
funds normally has a one-month term, draws on dates other than
the maturity date of them are subject to restrictions. In some
cases interim draws will not be allowed, or only one per month
will be allowed. If draws are required more frequently, a repurchase
agreement or investment agreement may be a better option.
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