Described by one investor as a "market that has never been stagnant," the asset-backed commercial paper sector has been consistently finding itself in a rut with liquidity issues.
In the more recent years, to tackle this debacle, market participants have been branching out and finding alternative forms of support and liquidity structures. In a conference last week sponsored by the Strategic Research Institute titled Critical Issues in Asset-Backed Commercial Paper Liquidity, one of the main focuses was on conduits that have paved the way in terms of seeking other liquidity options.
The two major problems faced by investors are: 1) receiving enough money from the assets included in the conduits, and 2) receiving the money in a timely manner.
As an example of the growing need for ABCP liquidity, the case of the conduit Eureka Securitization Inc./Eureka Securitisation plc, or better known as Eureka, was cited by several panel members at the conference.
Described by one ratings agency source as a project that "took too long to get done", Eureka is considered to be unique in the fact that it has a high concentration of trade receivables in its portfolio that are derived from a diverse mix of major European industrial and service companies.
Because of the high quality of the assets included, the third-party liquidity support provided by Citibank North America, a Citibank credit enhancement indemnity and guaranty agreement, as well as several other distinguishing characteristics, Eureka is attractive and stable as a conduit. In turn, it is expected to earn high ratings from all three ratings agencies.
Another example of searching for alternative forms of liquidity would be the infamous Bank One-sponsored Lake Front Funding Company LLC conduit, which closed in September 1999. Lake Front, which combined eight different asset types, was created to provide access to a type of liability and to attract a different investor base.
The program issues notes similar to ABCP called liquidity notes. Liquidity notes are a money-market instrument developed in response to the increasing costs and limited availability of traditional third-party liquidity costs. The notes, depending upon the circumstances, may be extended to a period of up to 390 days from issuance. Lake Front serves as an alternative liquidity support for ABCP issued by the two largest partially supported, multiseller ABCP programs sponsored by Bank One - Preferred Receivables Funding Corp. (PREFCO) and Falcon Asset Securitization Corp. (Falcon).
With an average of five new banks per year establishing conduits and the development of 15 new conduits per year from banks that are already active in the ABCP market, it is evident fact that ABCP conduits are considered by most to be attractive.
"Conduits make money - that is the reason for so many," said one market participant at the conference.
Although these "alternative liquidity" conduits are not new to the ABCP markets, market observers feel that more of these "non-traditional" programs will make an appearance, as investors continue to feed their appetites for liquidity.
