What drives issue spreads on commercial paper? Evidence from New Zealand commercial paper tenders

This paper aims to examine how issue spreads are determined in the New Zealand commercial paper market both before and after the onset of the global financial crisis.

This paper uses regression analysis on data from 1,340 commercial paper tenders conducted by 26 issuers between mid-2003 and mid-2011 to explore how credit risk and liquidity factors impact on issue spreads.

Prior to March 2008, issue spreads are higher when issuers have a weaker credit rating, risk aversion is high and investor appetite for the issue is low. There is no term premium in issue spreads. After March 2008, credit ratings have no influence on issue spreads, while the influence of risk aversion is weaker. Issue spreads are more sensitive to the investor appetite and the term of the issue. Investors assign higher spreads to issues made by securitisation conduits despite these entities retaining the highest possible short-term credit rating, reflecting the erosion of confidence in credit ratings on asset-backed securities.

This is the first published study of the New Zealand commercial paper market. The results show that since the onset of the global financial crisis, investor perceptions of credit risk have played a more important role in the determination of issue spreads than short-term credit ratings. This is consistent with a loss of confidence in credit ratings on asset-backed securities.