What is rollover risk for commercial paper and why did it cause problems in 2008?

Rollover risk is the danger that a borrower will be unable to issue new commercial paper (CP) to repay maturing CP. Since CP typically has maturities of 1-270 days, issuers must continuously roll their paper to maintain the financing.

How CP Rollover Works:

1. Company issues $500M CP maturing in 90 days
2. At maturity, company issues new $500M CP to pay off the old
3. This continues indefinitely — the company never truly 'repays' from operating cash
4. If the market freezes: No new buyers exist for the company's CP, and the maturing $500M must be repaid from other sources

Example — Cranston Electronics (fictional):

In Q3, investors refuse to buy Cranston's new CP. Cranston must:

1. Draw on its bank backup credit line (if it has one)
2. Sell assets quickly at fire-sale prices
3. Issue longer-term debt at much higher rates
4. In the worst case, face a liquidity crisis and potential default

Why This Is Dangerous:

• CP is unsecured — no collateral protection for buyers
• CP markets are confidence-sensitive — once doubt arises, the entire market can freeze
• Companies using CP have built their working capital financing around rolling it — suddenly losing access to $500M is catastrophic
• The contagion effect: if one issuer fails to roll, investors question all issuers

Risk Mitigants:

• Backup bank credit facilities (required by rating agencies for A-1/P-1 rating)
• Maintaining diverse funding sources
• CP programs typically require minimum credit ratings
• Keeping maturities staggered so not all CP matures at once

Exam Tip: The CFA exam tests understanding of CP as a money market instrument. Know that rollover risk is the primary risk, that backup lines of credit are essential, and that CP is always short-term (max 270 days in the US).

Practice money market questions in our CFA Level I bank.