While many ABCP bank sponsors under liquidity pressure have considered issuing asset-backed medium-term notes (MTNs) as one solution to their woes, recently market sources are reporting a particularly robust number of potential sponsors considering MTN and/or hybrid ABCP (or extendible note)/MTN programs - and a new target audience for these programs: unsecured term investors.
"MTN programs can access investors who may not yet be comfortable taking the extension risk on extendible-note programs or who may not yet have internal approval for that product," said Marilyn Hill of Lehman Brothers' asset-backed finance group, who participated in a Standard & Poor's-sponsored teleconference on the topic last Thursday. "MTNs could also be a good investment opportunity for the unsecured investor base, who is often looking for floating-rate product as a hedge to rising interest rates. Of course, these investors will need education and pricing incentive, so they are a targeted audience that needs some development."
Single-seller issuers and SIV sponsors have increasingly used MTNs as a core funding component of their programs, and the benefits of MTNs - additional liquidity, and the ability to avoid dependence on short-term funding - have led many sponsors to either amend their programs to include MTNs, or to create new programs containing both ABCP and MTNs.
However, MTNs are still too expensive for multi-seller programs, as sponsors do not want to pass on the higher cost to their sellers. Despite this, issuers eventually reach a "break-even point", Hill says, when the value of tacking on MTNs to a program outweighs the slightly higher cost of issuing them. "When MTN issuance starts to make sense, investors come on board, so pricing starts to improve for issuers. But issuers must provide investors with enough information to make an informed credit decision," Hill noted.
While the trend has not completely caught on for multi-seller programs, single-seller issuers who want to be more long-term in their maturities have sung the praises of adding MTNs. "We issue MTNs to facilitate a more defensive posture," says Larry Angelilli, senior vice president of Centex Corp., which runs two CP programs, Harwood Street Funding I, made up of conforming product, and Harwood Street Funding II, which is composed of subprime mortgages.
"Due to the more conservative nature of our company...MTNs give us the ability to stage our maturities and diversify our funding sources, so we are less reliant on short-term maturities," he added. "When 9/11 happened, and the CP market was tested, we passed with flying colors...we were able to sell these notes at a cost-effective rate."
Still, from a structural standpoint, setting up a new program or amending an existing one to include MTN issuance presents some burdensome administrative and legal problems for issuers. While asset-backed MTNs are primarily triple-A rated, CP is often underwritten to double-A-minus or single-A standards. Therefore, issuers must decide whether it behooves them to segregate the cashflows of the two products, and if they choose not to, the entire pool must be underwritten to the standards of the triple-A MTNs.
"There is time and cost involved in re-underwriting existing pools to the triple-A level," noted Manjeet Kaur of S&P's structured finance group.