Shrugging off a year of relative inactivity, ABCP market participants are hopeful, if not optimistic, that the sector will begin growing again in 2004, now that many of the past year's concerns are being flushed through the market.
Roughly 200 ABCP professionals attended last week's 7th annual commercial paper conference hosted at the Marriot Marquis in New York by the Strategic Research Institute. Last year's rendition of this gathering was timed with the release of Financial Interpretation No. 46, and, accordingly, accounting and its impact on the market was the main thing going on.
Last week, Merrill Lynch's Stephen Newman provided some interesting statistics on the FIN 46 restructuring in the U.S. banking industry. According to Newman, there are 18 U.S. banks with active conduits. Seven of these have completed FIN 46-related restructurings (or have nearly completely), seven have consolidated and four are structured through QSPEs. In all, these U.S. banks sponsor 52 programs, 32 of which are restructured ($109 billion), 16 of which are consolidated ($75 billion) and four of which are QSPEs ($13 billion). It's possible that the QSPE-structured programs will end up issuing first loss tranches, depending, though, on the final amendment to FAS 140, currently on the Financial Accounting Standards Board to-do list.
While this is all well and good, the issue of FIN 46, encouragingly, no longer dominates the discourse - on to more exciting topics then, such as extendable note technology, term-market/ABCP convergence, new structures, growth in the ECP market and improving industry trends, such as rising utilization rates.
ECP on a growth tear
Beyond extendable technology (see facing page), the trend hardest to miss is the uptick in European ABCP (ECP), which totaled just less than $100 billion at the end of the 2003, and could see growth in the 50% range this year, said panelists on a Europe-focused panel. Some match the ECP market's trajectory to that of the U.S. ABCP market in the late 1990s, when it saw double-digit expansion almost every year.
Session moderator Louise Mason, a vice president in the London office of Credit Suisse First Boston, noted the prime-time slot ECP received this year (10 a.m., day one) versus the "graveyard" slots awarded to the topic in past years.
Unlike the early years of the U.S. market, the ECP market has been more securities-focused, with volume coming from arbitrage conduits and structured investment vehicles. With SIVs, securities arbitrage vehicles and CDOs of ABS all competing for similar assets, the conduits are looking for new areas of origination. One growth area has been in more traditional U.S.-style ABCP assets, such as credit card loans, auto loans and trade receivables. These are considered more customer-focused transactions, rather than arbitrage.
That said, three to four new European-based SIVs are expected to close before the end of the year.
Of the positive trends in Europe, the depth of liquidity has attracted new investors, such as sovereigns, corporate buyers and European funds. In the past, many of the European assets were funded in the U.S. ABCP market.
European corporates have begun outsourcing their short-term cash management to money-market funds, another positive trend for the ECP market, as it adds more sophisticated borrowers.
Within the last two weeks, ABN ARMO's Tulip Funding issued Europe's first-ever round of extendable CP. The program was approved to issue euro extendable notes in February, and U.S. dollar extendables in November 2003. While those on the European panel considered the event fairly notable, Tulip's program is not directly comparable to the programs seen in the U.S., which have the effect of reducing liquidity requirements. ABN AMRO is still providing 100% liquidity support; the extension period does not relieve the bank of its liability but allows the bank to delay repayment.
Once extended, the Tulip notes change to floating rate with a monthly reset based on Libor. The program's liquidity is reevaluated at each reset to ensure it is sufficient. According to a source at the bank, ABN AMRO is working toward an extendable ECP program that would reduce its liquidity requirements. This first round from Tulip was somewhat of a test, and was received well by investors.
"[Moody's Investors Service] has noted a growing interest among European conduits in issuing extendable notes," said Edward Manchester, a vice president and senior analyst at the rating agency. "Following Tulip's recent debut in the European market, we expect other European issuers to place extendables by year-end."