With the market turmoil and investors demanding better credit quality programs, ABCP issuers are responding by cleaning up their act.
In a recent report by Fitch Ratings, analysts said that many of the surviving ABCP conduit administrators have initiated some proactive measures to not only improve the credit quality of their respective portfolios but also to enhance the structural protections given to ABCP buyers.
Some of these measures include cleansing portfolios of troubled exposures and removing specific asset classes altogether, as well as tightening covenants and triggers with sellers.
"Internally, issuers' appetite for risk has really diminished," said Michael Dean, managing director in the ABCP group at Fitch. "Externally, investors buying these programs are looking for protection as well as disclosure, and they are being vocal about that."
Dean said that issuers are fully supporting certain transactions within portfolios where there are viewed to be problem sectors or even going as far as to fully support entire portfolios. They are also looking ahead. "We continue to see as deals come up for renewal that issuers have become much more conservative in terms of advance rates," Dean said, adding that whereas before deals might have been structured in the single-A range, these transactions are now being structured all the way up to the triple-A level or at these issuers' highest internal measures.
If issuers are stepping up to the plate, one of the factors driving this move is that investors have been demanding more from them.
"We are seeing signs that the market has begun to take steps toward a re-launch - an ABCP 2.0, so to speak, sparked by investor demand for greater clarity from both issuers and the rating agencies," Standard & Poor's analysts said in a recent report that can be found in S&Ps RatingsDirect.
A significant feature of ABCP 2.0 is risk-based pricing. "Before August last year, there was a narrow band of pricing for ABCP conduits," said Scott Sehnert, an ABCP analyst, in a separate interview. "These conduits used to price on top of one another, but now things have changed and investors are looking for more granularity in information, such as on the nature of the asset, counterparties and swap providers."
S&P also noted that other factors that could alter the ABCP landscape are potential regulatory and accounting changes. The rating agency report noted that the Bank for International Settlements is now considering Basel II revisions addressing the concerns raised by the current lack of market liquidity. These revisions could possibly increase the regulatory capital burden for the banks that offer liquidity lines to ABCP conduits. S&P also noted that the Financial Accounting Standards Board is now working on revising its rules, which might cause banks to consolidate the conduits' assets on their balance sheets. As a result of these impending changes, many conduit sponsors are starting to incorporate the potential for increased regulatory capital costs when dealing with clients, the rating agency said.
In related ABCP news, last week Fitch released its rating methodology for assessing the risk assumed by providers of deal-specific liquidity and credit enhancement facilities to ABCP conduits under the Basel II framework. Banks are now required to hold capital against the support facilities they extend to ABCP programs. Fitch said that the amount of capital is calculated by the facility's credit quality or rating. The agency outlined its key considerations when rating these facilities, examining the underlying assets supported by the facility and applying the relevant asset criteria. Additionally, Fitch said it considers the support facility's unique features that might affect the rating, including the narrowly defined conditions to draw or available enhancement.
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