Volume in the ABCP market has hovered steadily in the $725 billion range by the Federal Reserve's count, down from last November's $740 billion area. Most players don't see a whole lot of growth over the next month or so - contrary to the typical year-end push - but believe activity will increase notably in the new year.
The trend of single-seller mortgage loan conduits continues to be one of the primary areas of growth in the market. So far this year, Ameriquest Mortgage, New Century Financial and Countrywide Home Loans have established these programs, which serve as a cheaper alternative to traditional warehouse facilities used for funding between term securitizations. Several more of these structures are in the works, said rating agency officials and bank researchers. For example, last week JPMorgan Securities included a special write-up on mortgage-backed liquidity notes in its quarterly update on ABCP.
It is rumored that Option One Mortgage Corp. and Household International are in the pipeline with soon-to-be-launched mortgage conduits, along with not-so-well-known originators Taylor Bean and American Home Mortgage.
Interestingly, the resurgence of single-seller ABCP conduits - mortgage or otherwise - is being partially attributed to the forever-tangling FIN 46, the consolidation guidelines that the Financial Accounting Standards Board published in January. Some say the uncertainty in the economics for multi-seller conduits sponsored by Wall Street firms was one of the factors driving originators to establish their own exposures to the ABCP investor universe. At the very least, there were initial fears that FIN 46-related costs would be passed on to the seller in multi-seller conduits. Whether this change in pricing has occurred, several banks have wound down their conduits, either refinancing into newer structures or exiting the market.
All the while, the investment appetite for ABCP has continued to increase. According to JPMorgan, part of the most recent spike in demand is related to a change in money market fund-rating criteria from Standard & Poor's, whereby the rating agency does not consider extendible notes booked to maturity as part of the 10% basket for illiquid securities.
Aside from the surge in traditional single-seller conduits, one-off deals, perhaps best described as single-issue securities arbitrage conduits, are being structured for the benefit of term transactions. In the past, most of these deals have been more akin to an ABCP tranche of a CDO, often seen in WestLB's Blue Heron structure (see ASR 6/30/03).
As a twist on that strategy, some parties to CDOs are creating stand-alone ABCP conduits to absorb the entire triple-A term tranche of the deal, financing the purchase through the ABCP market. Some call these "maturity shortening" trades. Whatever they're called, they allow the CDO, as well as other juicier structured finance vehicles (namely CMBS) direct access to ABCP investors.
While traditional securities arbitrage conduits are still considered a large investor component to the top classes of CDOs, the spate of downgrades over the past few years has caused the conduit market to be weary of a long-term commitment to a CDO.
As noted in JPMorgan's write-up, INVESCO set up a conduit called CCN, which absorbs the triple-A class of INVESCO's Bluegrass ABS CDO. JPMorgan also describes STRIPS III, a Deutsche Bank conduit that funds CMBS, as well as the ABCP-style money market tranche of American Capital Access' Grenadier Funding.