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I was reading up about commercial paper on investopedia. It says that commercial paper is a form of short-term unsecured debt. It then goes on to say that

Commercial paper is not usually backed by any form of collateral, making it a form of unsecured debt.

In the accompanying video...

Buyers have no claim on a company's assets if the company fails to pay up at maturity. Therefore only firms with good credit can successfully sell commercial paper.

Is this to say that a company could sell $10M worth of commercial paper, and refuse to pay it back with no consequence other than a dismal credit rating?

Read more: Commercial Paper http://www.investopedia.com/terms/c/commercialpaper.asp#ixzz4x6yFnpYx

Rodrigo de Azevedo
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colorlace
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3 Answers3

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It'd be more accurate to say that you have no priority claim on the assets of the company.

With a secured loan, you have security over the collateral and if the company failed to repay the loan you could seize the collateral and sell it to get your proceeds.

With an unsecured loan, the company still owes the money and if they're still solvent you can take them to court to get it back. If they fail to pay up because they've gone bankrupt, then you would have a claim against the "estate", i.e. any general remaining assets of the company after secured loans and higher priority creditors have been repaid. So probably in that circumstance you'll only get a part of your loan back (perhaps nothing).

But a company that does have the money to repay you absolutely has to do it. In the end if they refused a court and the subsequent collections process would force them to, by seizing their assets if necessary.

Ganesh Sittampalam
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with no consequence other than a dismal credit rating?

  1. I'd say that's a pretty severe consequence, given that at some point in the future they'll need to borrow money again, and no one will lend it to them.
  2. Part of the contract is a legal promise to pay it back. It's fraud (a criminal offense) to sign a contract with the foreknowledge that you plan on breaking it.
RonJohn
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Yes, in the same sense that it's totally legal to refuse to pay your credit card.

But if you do so, you can expect that nobody else will loan you money, and for the debt holder to take you to court to try to force you to pay.

But you won't face criminal charges for it unless you engaged in some pretty blatant fraud.

Shawaron
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