In 2002, the asset-backed commercial paper market has experienced its first slowdown in growth since inception, though it continues becoming a more substantial proportion of the entire CP market. In August, ABCP outstandings increased for the first time in several months, totalling $709 billion. The ABCP market currently makes up approximately 65.32% of the total commercial paper market up from 52.65% in July.
By far, the most pressing issue facing the ABCP universe - and what many consider to be the driving factor in the slowdown of ABCP issuance - is the uncertainty associated with the Financial Accounting Standards Board (FASB) consolidation project. Should the final guidelines closely resemble the draft, participants in ABCP, both sponsors and sellers, could be made to consolidate assets previously moved off balance sheet.
In its latest 10-Q filing with the Securities & Exchange Commission, for example, FleetBoston Financial Corp. stated that it may be forced to consolidate onto its balance sheet as much as $6 billion in assets associated with its ABCP conduits.
Additionally, disclaimers have been made by other large institutions that administer conduits, such as Bank of Nova Scotia and PNC Financial Services Group. PNC stated in a recent 10-Q that "The effect of the Proposed Interpretation on the Corporation's financial condition or results of operations cannot be determined at this time."
According to an analysis by Moody's Investors Service (see p. 14), bank sponsors are at risk of having to consolidate the SPEs associated with conduits, particularly multi-seller and credit arbitrage vehicles. Structured investment vehicles will be more likely subject to the equity consideration, along the lines of CDOs. Single-seller conduits can be structured as FAS140 QSPEs to avoid consolidation, Moody's said.
The exposure draft was released to the industry in June, and the deadline for commentary was Aug. 30. ASR recently reported on the American Securitization Forum's 29-page comment letter, which argues that the guidelines as proposed would materially impact the securitization markets, and that, except under unusual circumstances, no one should be made to consolidate securitization-related SPEs, especially when used as a mechanism for risk diversification (see issue 8/26/02).
Depressed economic activity has also stunted the market, as corporations have had less need for funding, and reduced accounts receivables. Risk appetite from the financial services industry has lessened over the last year, notes Moody's Sam Pilcer, especially in light of corporate credit blowups. Bank lenders have tightened their profiles.
Problem assets in conduits
Meanwhile, according to a head of ABCP trading at one of the top dealers, demand for paper has shown little weakness, and spreads have held relatively firm despite some notable headline events, such as the bankruptcies of several corporations that had previously established single-seller conduits. The bottom line is that investors in ABCP have yet to be impacted or suffer losses. As champions of ABCP like to say, each of the events is testament to the strength of the market.
But how long can this last? As is an issue with term securitizations from financially strong issuers (i.e., commercial banks), one of the reasons, arguably, that investors are comfortable with ABCP - and that program credit enhancement has, essentially, never been drawn upon - is that the sponsors historically have funded problem assets out the conduits before reaching that point.
Recently, regulators have focused on issues like "implied recourse" and "arm's length," which might lead to troubled assets remaining in conduits longer than they have in the past.
Examples of headline events include the bankruptcy of rental car concerns ANC Rental Corp. and Budget Group. Also, as expanded on in Fitch Ratings' contribution to this issue (see p. 10), there have been a handful of problem assets found in mulit-seller and securities arbitrage conduits, such as NextCard's credit card term deals, which, as new issues, were purchased in part by conduits (conduits are said to be one of the largest investor bases for triple-A rated ABS). Most visibly (as it was revealed in an 8-K filing), a WorldCom receivables club deal made the headlines when the failed telecom filed for bankruptcy in July. In the last several months, there have even been instances of fraudulent receivables showing up in conduits.
And yet, ABCP investors have not been directly impacted by these events. Instead, as was the case with WorldCom, liquidity providers funded out the problem assets, and program credit enhancement was never drawn. In this instance, according to Moody's, the liquidity providers have already been refunded by WorldCom's debtor-in-possession loan facility.
Also on the horizon, bank sponsors that haven't already will need to address the new risk-based capital adequacy requirements as it applies to program credit enhancement, which becomes effective for existing pre-2002 transactions by the end of this year.
Essentially, the credit enhancement tranche of a conduit will follow the same risk-based capital guidelines as ABS bonds held on a bank's balance sheet. To score more favorable treatment, banks are considering a few options. Some have already worked out agreements with their regulators, but according to market sources (and commentary released by the rating agencies over the past few months), many sponsors are considering having the CE tranche rated, which would allow it more favorable capital treatment. Both Moody's and Fitch have indicated that rating the CE tranche would be similar to rating CDO tranches, since the the conduit is vehicle backed by a pool of varying credit exposures.
Other trends and growth
Interestingly, JPMorgan Securities estimated in an August report that ACBP conduits hold as much as $60 billion in outstanding CDO paper (or there is as much as $60 billion in CDO-backed ABCP). As mentioned, conduits are considered one of the largest investment bases for triple-A rated ABS.
According to Moody's, during the second quarter, conduits absorbed about $1.5 billion in credit card receivables - in private pool additions, separate from securities purchases - and $67 million in CDOs.
On a relative basis, the European ABCP market (ECP) has seen substantial growth, up 41% to E46 billion from E27 billion, according to Fitch. What's significant, sources said, is that conduits that previously funded European assets exclusively in the U.S. ABCP market are being restructured so that they can issue ECP as well, taking advantage of the demand in Europe.
As discussed during a July conference hosted by the Strategic Research Institute (SRI), up to 19 SIVs are expected to be active
by year-end, up from 14 at the start
of the year. According to Moody's, four new SIVs are set to be establish-ed end of the year. New SIVs al-
ready active or launching near term
include Stanfield Victoria (Stanfield Global Strategies), PACE (Societe Generale), Tango (ABN Amro/CitiBank) and Seaside
Finance (Mizuho Corporate Bank), among others.
On the growth front, industry participants expect SIVs to begin investing in credit derivatives - or selling protection - and nearly all active vehicles have expressed interest. "There's some talk about SIVs purchasing or issuing credit derivatives, but this has not happened yet," said Moody's Pilcer. "It's just at the discussion stage."
SIVs account for about $35 billion of ABCP outstandings, according to Moody's. The structures also have a substantial amount of medium term notes outstanding, in the $50 billion-plus range.