ABCP outstandings throughout North America continue to decline as both the supply of and demand for paper has weakened. While conduits with non-traditional structures or those financing out-of-favor asset portfolios have exited the space, the remaining market players continue to cleanse unfavorable asset types from their portfolios and terminated non-core banking relationships.
Investors are increasingly migrating back to traditional multi-seller ABCP programs sponsored by highly-rated financial institutions as credit quality continues to improve. What may also help with new ABCP issuance is that the Straight-A Funding program has ramped up significantly in recent months and now exceeds US$30 billion.
The interest, however, may be tempered in the coming months on lingering concerns about the health of banks, and in particular, regional banks. This will be a main focal point for the ABCP market for the remainder of this year.
Overview: U.S. Banks
Fitch's rating outlook for the U.S. banking sector remains negative, though pressures are easing. The Negative Outlook is focused mainly on regional U.S. banks, over 80% of which carry either a Negative Rating Outlook or are on Rating Watch Negative by Fitch.
Fundamental financial performance for the banking sector will remain weak throughout most of the rest of this year. That being said, the pace of downgrades is slowing as banks have generally augmented capital through common equity issues and made meaningful progress dealing with problem loans.
While Fitch does not see the banking industry as 'out of the woods', the level of additional challenges to fundamental performance appears to be leveling off. Aside from the problems with commercial real estate exposure, the most significant challenges continue to be legislative and regulatory in nature, in addition to the ability of banks to manage changing interest rates.
As it pertains to ABCP, this is leading to some concern over counterparty exposure to financial institutions providing credit and liquidity facilities. The consolidation of conduits onto bank balance sheets and associated risk-based capital requirements is another area that Fitch is watching closely.
Overview: U.S. ABCP
Fitch's rating outlook for ABCP, like U.S. financial institutions, remains negative for the rest of this year seeing as these institutions are the primary providers of liquidity support and credit enhancement.
U.S. ABCP outstanding stood at $401.4 billion through March 2010, representing a 36% year-over-year decline and a drop of 62% from the market's 2007 peak of US$1.2 trillion. ABCP accounted for 39% of the total amount of U.S. CP (corporate and asset backed) at year-end 2009, compared with 44% at year-end 2008.
Money managers who are purchasing ABCP are still concentrating on traditional programs, particularly bank-sponsored multisellers backed by 100% liquidity support. Sponsors are also keeping up efforts to strengthen transactions and conduit structures. The government provided welcome liquidity to the market in the form of the AMLF and CPFF. But after peaking in January of last year at 22%, its exposure to the U.S. CP market via the two facilities has been declining steadily ever since, ending 2009 at under 1%. There remains concern over the regulatory climate, particularly related to balance sheet treatment and risk-based capital requirements.
Consumer assets and trade receivables still represent the majority of conduit holdings. Collateral credit quality is expected to worsen as the effects of the recessionary environment pervade most U.S. sectors, but many conduit administrators are taking proactive measures to improve the credit quality of their portfolios and enhance the structural protections afforded investors. Unlike term securitizations, most conduit transactions employ dynamic credit enhancement mechanisms, which bolster protection as performance deteriorates. While performance measures are expected to worsen for most consumer asset classes, rating actions are expected to be limited, particularly for senior tranches typically funded through ABCP conduits. Potential ABCP rating actions, should Fitch see the need to take them, will be precipitated by the health of sponsors, liquidity providers, and other relevant counterparties.
Overview: Canadian ABCP
Bank-sponsored multiseller conduits with global-style liquidity facilities still dominate the Canadian ABCP market. The assets of choice continue to be auto lease (27%) and loan (21%) obligations, which still represent the largest portion of Fitch-rated Canadian ABCP, followed by equipment finance (21%) and credit cards (19%).
Canadian ABCP totaled approximately CAD32.2 billion through the end of last year, down more than 37% from year-end 2008 outstandings of CAD51.6 billion. The market's outstandings have been impacted by the closure of several conduits, along with sponsors' efforts to focus on core bank clients. Additionally, exiting non-core relationships, and de-risking steps by banks to remove conduit transactions or asset types not viewed favorably by investors.
The year 2009 saw the launch of the Business Development Bank of Canada's (BDC) Canadian Secured Credit Facility (CSCF). CSCF, to which the federal government allocated CAD12 billion, was established to help thaw the freeze in the financial markets that led to a shortage of available financing in certain sectors, particularly for vehicles and equipment, through its purchase of term ABS. In November, CNH Capital Canada Ltd. became the first issuer to tap CSCF through its sponsored and administered trust, CNH Capital Canada Wholesale Trust, with a CAD300 million note backed by dealer floorplan receivables under the facility. CSCF could lead to further depressed ABCP market outstandings by providing an alternative to conduit financing in the short term. However, the effect is expected to be short lived with CSCF now expired.
On the positive side, Fitch is seeing signs of a trickle of new deal activity, primarily for the core consumer asset classes of credit cards and autos. Market participants may look to tap conduit execution for their financing needs with the CSCF now expired.
Given investor sensitivity to conduit holdings, conduit administrators will likely maintain high credit quality portfolios while shunning nonstandard asset classes. All Canadian ABCP programs with prior general market disruption liquidity structures have converted to global-style liquidity standards. Aside from a select few sponsors, who conform to the global standard of maintaining programwide credit enhancement to support their ABCP programs, most Canadian ABCP programs still do not benefit from this layer of support. However, more bank sponsors may be adding this form of additional loss protection to their programs this year.
Michael Dean is a managing director and head of Fitch's North American ABCP group. Darryl Osojnak is a managing director and Kevin Corrigan is a director in the group.