If whatever doesn't kill you makes you stronger, the ABCP market must be benching twice its weight by now, having dealt with WorldCom and Budget Group all in the same week, with barely a blip in spreads and nary a threat to investors, according to ABCP sources and the rating agencies.
And these are just the most recent issues the market has dealt with and emerged from relatively unscathed. Another issue, for example, was the complex Ponzi-like receivables fraud deal that showed up in PNC Bank's Market Street Funding, yet was funded out entirely almost immediately.
The most trying of them all, perhaps, are the pending changes to consolidation accounting, but that is a story all its own (see front page for our most recent attempt at it).
Meanwhile, as reported in last week's ASR, the entire $1.5 billion of WorldCom trade receivables exposure, which showed up in close to 10 separate conduits, was purchased out and onto the balance sheets of the liquidity providers within a day or two of the news that WorldCom had mis-accounted for approximately $3 billion. According to an ABCP trading source at one of the major banks, the event had minimal impact on spreads in the market.
"I think it was pretty clear that there wasn't really an impact on the conduits from a credit standpoint," the source said. "The rating agencies, I think, came out and affirmed the programs, and while it might not have been necessary, I think it's pretty representative of just how the market viewed it."
Further, there is no indication that the receivables themselves will not perform as expected. The liquidity providers apparently decided that if it turned into a workout situation, it would be more easily dealt with on balance sheet rather than in the conduits.
In rare instances, some liquidity purchase agreements have claims on program credit enhancement, but such was not the case with any of the facilities associated with WorldCom.
As for Budget, according to Moody's Investors Service weekly roundup, the rental car company's single-seller conduit repaid all of its $477 million in outstanding ABCP via a combination of $400 million in liquidity advanced from its providers, including Credit Suisse First Boston and Deutsche Bank, and a letter of credit from CSFB, which allowed the conduit to draw the additional $77 million. Though the conduit had an unusual structure, in that the funding was based on a combination of both the liquidity and the LOC, the event still marks a program drawing on its credit enhancement, which is a rarity for the ABCP market.
Though these events affirm the structural protection of the market - as no investors suffered losses - in the long term, the cost of liquidity will probably rise. The liquidity facilities for sellers are priced case-by-case, but over the past few years, regulators have been scrutinizing liquidity lines, requiring banks to hold capital against them, which has already added upward price pressure.
"Most intelligent players in the CP market base their pricing on economic risk," said a rating agency source. "In other words, they should have assessed a certain amount of risk on the WorldCom deal, irrespective of whether they have to post capital against it or not."