Alternative liquidity has been the pot of gold in the asset-backed commercial paper sector in 2000, as these new program structures have helped keep the market from slowing as much as was anticipated earlier in the year.
The most talked-about conduit of 2000 has been Eureka Securitization Inc. because of its unique structure to reduce third-party liquidity to less than 100%.
As Citibank's European conduit, Eureka was able to be restructured to reduce the amount of third party liquidity needed to maintain a Prime-1 rating from 100% of outstanding ABCP to a level around 60%. Furthermore, Eureka has reduced its credit enhancement from 10% to 4% of outstanding ABCP.
Financial institutions wishing to duplicate Eureka's success, however, are running into difficulty. This is mostly because of the conduit's relationship with its sellers and the characteristics of its assets.
"The Eureka program was a pretty hot topic for a while and I think the various sponsors realized that they don't have the exact same fact pattern as Eureka," said Tom Fritz, a director at Standard & Poor's Ratings Services. "It is fairly unique in its capabilities and abilities. So it's not going to easily be replicated here."
Other unique structures to reduce third-party liquidity include Hypo-und Vereinsbank AG's Bavaria program and Lake Front Funding. "The search for alternative liquidity and alternative liquidity structures will continue, but more at a measured pace, looking for something that is financially viable," Fritz said, noting that the reaction to alternative liquidity still could be a constraining factor in 2000.
He also noted that other proposals have been made, none of which actually reaching fruition.
Eureka's success, despite its difficulty to be duplicated, has prompted smaller, regional banks to consider forming conduits of their own. For instance, Birmingham, Ala.-based Compass Bank is in the process of forming a $2 billion ABCP conduit. The smaller banks see setting up these types of conduits as an economic benefit, to get assets off their balance sheets, as the conduit is not owned by the bank.
Because of creative conduit structures and the willingness for smaller banks to form their own programs, the asset-backed commercial paper market has not slowed this year as much as had been predicted. According to a report issued by Moody's Investors Service, the first quarter of 2000 had $504 billion in outstandings, a 2% increase over the $493 billion in the fourth quarter of 1999.
At the end of August 2000, conservative estimates that were issued for total 2000 outstandings had been blown away, and the numbers were closely approaching the more liberal estimates. Many institutions are predicting $600 billion in outstandings for the sector by the end of the year.
"I think it's just partly the number of conduits and the number of bankers out there beating the bushes for business that continue that growth," Fritz said. "It's still an attractive funding source."
"In addition to CBO/CLO, the CP market doesn't have big deal sizes which really lead to a huge jump in the CP market size," added Manjeet Kaur, a director at Standard & Poor's.
Others believe that the Y2K issue, which did not amount to much, left some pent-up demand from 1999. "This time last year, people were like, Well we want to close third quarter, because if we don't close in the third quarter, we'll wait to next year,'" said Dwight Jenkins, vice president of Lord SPV, a securitization services company, who also stated that the economy's continued growth has helped increase the market this year.
Minimizing the amount of credit problems within the conduits has also become a prominent factor in making the ABCP sector more efficient.
According to S&P's Kaur, administrators are removing deals from conduits well before a problem could evolve, eliminating any negative impact on the program. "I think the administrators are very cognizant of the impact of potential problems and just fund the deal out or put it back on the books of the bank or whatever well ahead of time," she said.
Fritz added that investors typically do not know which sellers are involved with the program. When a seller drops out of the conduit, the investor only receives the number that was assigned to it - not the name - providing an orderly withdrawal of the seller. "We're pleased to see that because it means that the structures are working as they're supposed to," he said.
