Commercial Paper

July 2013

Member NYSEFINRA SIPC

Discussion Materials

2

Commercial Paper Overview

3

Discussion Summary

■ Commercial Paper Overview

■ Types of Commercial Paper

■ Types of Issuers

■ Available Returns

■ Investment and Policy Considerations

4

Short-Term Investment Alternatives

■ NCCMT

■ Bank Deposits

■ CDs

■ Repurchase Agreements

■ T-Bills

■ Agency Discount Notes

■ Municipal Securities (Variable Rate)

■ Commercial Paper

NCCMT Holdings as of 6/30/13Investment Options

Financial CP51%

Asset-Backed CP

14%Non-Financial CP 1%

Treasury 9%

Variable Rate Municipals

8%

Agencies6%

Repurchase Agreements

11%

5

Commercial Paper Overview

■ Short-term, unsecured Promissory Note

■ Primarily sold by corporations, financial institutions and foreign governments as a low cost, short-term financing vehicle

■ Access to capital without expense of SEC registration

■ Maturity is normally up to 270 days, with most issuance less than 90 days

CP Maturity DistributionOverview

1-4 days60%5-9 days

13%

10-20 days4%

21-40 days9%

41-80 days3% 81+ days

10%

Days to Maturity

Source: Federalreserve.gov

6

Commercial Paper Overview

■ Issued in denominations of $100,000 or greater

■ Discount security where investor purchases notes at less than par and receives par at maturity

■ Over $1.0 trillion in commercial paper outstanding

90 Day CP Yields since 1997Overview

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

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Commercial Paper Types

■ Commercial paper sold under Section 3(a)(3) of the Securities Act of 1933:

■ Must finance “current transactions” (i.e. operating expenses or current assets such as receivables and inventories)

■ Maturity must be less than 270 days

■ Issuers often elect to roll-over on a continuous basis

■ Not ordinarily purchased by general public

■ Limited Secondary Market

3(a)(3) Commercial Paper

8

Commercial Paper Types

4(2) Commercial Paper

■ Commercial paper sold under Section 4(2) of the Securities Act of 1933:

■ Cannot be publicly offered (private placement)

■ Can only be sold to “Accredited Investors”

■ Intended for Institutional Investors with no planned resale

■ Security can only be sold or transferred through originating placement agent

■ No maximum maturity

■ Highly illiquid

9

Selected Issuers of 3(a)3 and 4(2) CP

Issuer Industry Issuer Industry

Abbott Laboratories Consumer John Deere Capital Corp FinancialAir Products & Chemicals Basic Materials JP Morgan Chase & Co FinancialCaterpillar Inc Industrial Nestle Capital Corp ConsumerCoca-Cola Co Consumer Pepsico Inc ConsumerDeere & Company Industrial Praxair Inc Basic MaterialsDuPont Basic Materials Private Export Fund Corp FinancialEli Lilly & Co Consumer Siemens Capital Co LLC IndustrialExxon Mobil Corp Energy Svenska Handelsbank Inc FinancialIBM Corp Technology Wal-Mart Stores ConsumerIllinois Tool Works Inc Industrial Walt Disney Company CommunicationIntel Corporation Technology* Short-term ratings shown are for 3(a)(3) Commercial Paper

10

Selected Risks

Sovereign RiskCompany Risk

Market RiskIndustry Risk

11

Commercial Paper Issuers

12

Types of Commercial Paper Issuers

CP Outstanding by Issuer TypeForeign vs. Domestic

CP Outstanding by Type (billions)

Financial Domestic 289.0Financial Foreign 257.2Nonfinancial Domestic 159.9Nonfinancial Foreign 56.0Asset-Backed 271.7Total 1,033.8

Financial Domestic28%

Financial Foreign25%

Nonfinancial Domestic

16%

Nonfinancial Foreign

5%

Asset-Backed26%

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

2001

-01-

03

2002

-01-

03

2003

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03

2004

-01-

03

2005

-01-

03

2006

-01-

03

2007

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03

2008

-01-

03

2009

-01-

03

2010

-01-

03

2011

-01-

03

2012

-01-

03

2013

-01-

03

Foreign CP

Domestic CP

13

Top Commercial Paper Programs

Select Financial Programs

■ General Electric Capital Corp.

■ Toyota Motor Credit Corp

■ Commonwealth Bk. of Australia

■ JP Morgan Chase & Co

■ Westpac Banking Corp.

■ Nordea North America

■ DNB Bank ASA

■ ING (US) Funding LLC

■ Sumitomo Mitsui Banking Corp.

■ Bank of Nova Scotia (NY)

14

Top Commercial Paper Programs

Select Non-Financial Programs

■ Coca-Cola Co. (The)

■ Wal-Mart Stores, Inc.

■ Nestle Capital Corp.

■ Nestle Finance Int’l Ltd.

■ Procter & Gamble Co.

■ Chevron Corp.

■ Reckitt Benckiser Treasury Services

■ Total Capital Canada Ltd.

■ BHP Billiton Finance (USA) Ltd.

■ Johnson & Johnson

15

Top Commercial Paper Programs

Select Asset Backed Programs

■ Kells Funding

■ Straight-A Funding

■ Atlantis One Funding

■ Chariot Funding

■ Jupiter Securitization

■ Old Line Funding

■ Govco

■ Alpine Securitization

■ Gotham Funding

■ Atlantic Asset Securitization

16

Asset-Backed Commercial Paper

■ Issued by a conduit/special purpose entity which purchases assets or make loans backed by assets

■ Manager determines asset purchases

■ Single-seller conduit typically purchases receivables from a single entity or related group of entities

■ Multi-seller conduit purchases assets from various entities

Underlying AssetsOverview

Commercial Loans12%

Auto Loans12%

Trade Receivables

14%Government Guaranteed

Loans2%

Consumer Loans

2%Equipment

Loans2%

Floorplan Financed

2%

Equipment Leases

3%

CBO & CLO3%

Residential Mortgage Loans

4%

Auto Leases6%

Student Loans8%

Other8%

Securities11%

Credit Card Receivables

11%

Source: Moodys.com

17

Asset-Backed Commercial Paper

■ Payment is supported by specific assets and/or credit enhancement

■ Individual assets often unknown by purchaser

■ More complex and less transparent than traditional commercial paper

■ Not suitable for all investors

■ Requires high level of investment experience

Underlying AssetsOverview

Commercial Loans12%

Auto Loans12%

Trade Receivables

14%Government Guaranteed

Loans2%

Consumer Loans

2%Equipment

Loans2%

Floorplan Financed

2%

Equipment Leases

3%

CBO & CLO3%

Residential Mortgage Loans

4%

Auto Leases6%

Student Loans8%

Other8%

Securities11%

Credit Card Receivables

11%

Source: Moodys.com

18

$0

$500

$1,000

$1,500

$2,000

$2,500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bil

lion

s

Asset-Backed

Nonfinancial CP

Financial CP

CP and the Financial Crisis

■ Volume of CP outstanding grew over 60% from $1.3 trillion to over $2.1 trillion between June 2004 and June 2007

■ Asset Backed CP more than doubled during this time period

■ Growth primarily driven due to new Asset Backed CP structures, including mortgage backed programs

CP Outstanding since 2001Overview

Source: Federalreserve.gov

19

$0

$500

$1,000

$1,500

$2,000

$2,500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bil

lion

s

Asset-Backed

Nonfinancial CP

Financial CP

CP and the Financial Crisis

■ Credit crisis brought upon reduction in asset valuations which led to failed asset valuation tests

■ Investors shifted from Money Market Mutual Funds invested in Asset Backed CP to those invested in treasuries

■ Over $400 billion moved from Sept. to Oct. 2008 in wake of Lehman bankruptcy

■ Federal Reserve created programs to generate liquidity for Asset Backed programs

CP Outstanding since 2001Overview

Source: Federalreserve.gov

20

Investing in Commercial Paper

21

Investment Considerations

■ Prime quality commercial paper bearing the highest rating of at least one nationally recognized rating service and not bearing a rating below the highest by any nationally recognized rating service which rates the particular obligation.

Investment and Policy ConsiderationsState Limitations

Type Moody's S&P Fitch

A-1+ F1+A-1 F1

P-2 A-2 F2P-3 A-3 F3

B BC C

Tier I P-1

Tier II

Not prime

■ Portfolio Limit

■ Individual Issuer Limit

■ Minimum Long-Term Ratings

■ Asset Backed Restrictions

■ Foreign vs. Domestic

■ Trading Characteristics

22

Available Returns

Overview

■ Various Factors Impact CP Yield Including:

■ Short-Term Benchmark Rates

■ Credit Risk of Issuer

■ Rollover Risk

■ Industry of CP Issuer

■ Supply/ Demand

Comparative Yields

Source: Federalreserve.gov*Data as of July 12, 2013

0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35%

Non-Fin. A2/P2

Asset-Backed

Financial

Non-Financial

90 Day Commercial Paper Yields

23

Purchasing Commercial Paper

90 Day CP Yields since 1997Direct versus Dealer Purchases

■ Direct Purchases

■ Larger financial institutions that sell a large amount of commercial paper continuously

■ Dedicated sales force internally

■ Dealer Purchases

■ Smaller financial institutions/corporations use dealers to place their commercial paper

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

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Issuer 30 60 90 120 180 270 S&P MDY

GE Capital Corp 0.050 0.090 0.130 0.150 0.220 0.240 A-1+ P-1Toyota Motor Credit 0.080 0.120 0.160 0.170 0.230 0.250 A-1+ P-1Toyota Cred Puerto Rico 0.080 0.120 0.160 0.230 0.250 A-1+ P-1Prudential Funding 0.090 0.100 0.120 0.130 0.150 0.150 A-1+ P-1Natixis US Fin Co 0.150 0.150 0.210 0.270 0.320 0.530 A-1 P-1Abbey Natl NA LLC 0.170 0.190 0.230 0.270 0.370 0.550 A-1 P-1Societe Generale NA 0.140 0.220 0.240 0.310 0.400 0.540 A-1 P-1

Intesa Funding LLC 0.280 0.410 0.470 0.510 0.670 A-2 P-2Dexia Delaware LLC 0.400 0.430 0.470 0.550 A-2 P-2

-------------Days to Maturity-------------

Selected Issuers

Source: Bloomberg – July 16, 2013

Market Yields

25

Summary

Summary Summary

■ High quality commercial paper can be an effective vehicle to help portfolio diversification

■ Requires a high degree of selectivity

■ Buy and hold investment

■ Should not be relied on for liquidity needs

■ Know what you own

■ Monitor companies you invest in

■ Market is an excellent indicator of credit concerns

■ Exercise caution with unusually attractive yields

26

Contact Information

James M. TraudtSenior Vice PresidentManager of Public Finance

One James Center901 E. Cary St Ste 1100Richmond VA 23219-4037(804) 697-2904 office(804) 549-4900 fax

jtraudt@investdavenport.com

Ty WellfordVice PresidentPublic Finance

One James Center901 E. Cary St Ste 1100Richmond VA 23219-4037(804) 697-2915 office(804) 549-4915 fax

twellford@investdavenport.com

27

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