Long gone are the glory days of ABCP. These days, the muted activity in the market is mostly limited to government-supported programs or restructurings. Market sources said that with things the way they are, investors can at least count on betting on a sure deal.
After growing to a $1 trillion dollar market, ABCP issuance has seen less than $600 billion issued over 2008, a huge dip that Craig Shallcross, a partner at LCP Capital, said is a testament to the inability to get financing in the current market environment.
The U.S. ABCP market has been bolstered by several government initiatives aimed at providing liquidity. According to Credit Suisse analysts, while volume was low in April and demand outpaced supply, it did not signal any market struggle. They added that spreads to Libor for some issuers improved by as much as five to 10 basis points, and those issuers who did not change their pricing saw increased volume.
"As we were all bracing for a possible repeat of late January, the banks' earnings did not kick us in the stomach, and now we can move on to the bank stress tests due to be released May 4," analysts said. "Due to the nature of the underlying assets, it does not seem plausible that there will be any material increases in ABCP outstandings over the next few months and, therefore, we could see this same sort of action of low to flat supply accompanied by continued pricing power for the issuer."
However, in Europe the story has unfolded quite differently, and most of the activity the market has seen has been reserved for a U.S. audience. According to Fitch Ratings, European ABCP outstandings fell to approximately $71 billion by the end of December 2008, a 47% decrease from December 2007. Attractive foreign exchange rates and the introduction of both the Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF) provided further incentive for European programs to issue primarily in the U.S. commercial paper market. Only a handful of large, fully supported programs have maintained sizable funding in the ABCP market, while other smaller programs may account for minimal issuance in Europe.
Jonathan Walsh, a partner in the finance department at Baker & McKenzie, said that in Europe business has slowed, with some programs slowing down and some even closing down. Others are restructuring to be able to provide bank and direct funding as alternatives to ABCP so as to switch in and out of direct funding arrangements. "In some programs, liquidity facilities are now being used for a dual purpose - backstop ABCP and funding purposes," he said. "We are also seeing more U.K. banks look at programs as an alternative method of funding provided they are happy with the underlying credit of the originator."
Walsh said that there seems to be a clear trend toward the more traditional underlying asset types and credits. "The structures that we have seen more clearly resemble those of the 1990s when the market first started," he said. "Trade receivables or anything similar, such as auto loans and consumer loans, are now the assets of choice. There is clear evidence that banks are looking toward those receivable types generated by existing relationship customers."
Shallcross said that a similar trend has evolved on the U.S. side, where investors have the infrastructure to sift though the list of products available, an infrastructure that is not available to European buyers. "We've gone through a cycle where things done in the past are not all surviving," he said. "Only those programs that are well designed and supported by commercial banks. And only if you have credit infrastructure that can make that kind of decision."
In the current market, identifying an obvious long-term trend or predicting the future is near impossible. "The market is suffering from downturn, but report of its demise is exaggerated," Walsh said. "Financial sponsors are reviewing their conduits in the light of the market and forthcoming regulations and are taking time to consider what to do about it. The European ABCP market has actually been active, but it is far less visible than the currently more static term market."
Credit Suisse analysts expect the market to go into the summer in this sort of "sweet spot" for ABCP issuers.
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