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Commercial Paper Forward Supply Contracts

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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