Over the past year the European ABCP market has seen $136 billion in issuance, according to sources, growing at a faster year-over-year rate than the U.S. counterpart - where issuance has tapered off substantially, particularly in the past several months.
According to a Fitch Ratings report, U.S. figures displayed a slowdown last quarter in both the ABCP being issued and in new programs being introduced.
The report attributed this trend primarily to lower financing levels required by issuers in the U.S., which have been affected by the slowdown in economic activity.
"There has been more access in the last eight to nine months - U.S. conduits are allowed to issue, and we are seeing more conduits setting up Euro-denominated assets," said one spokeswoman at Fitch. "You are also seeing interest on behalf of European market players to grow the ABCP market and eventually see it become a size market."
Market sources describe the growth as pretty dramatic when compared to what has been happening in the U.S. The proportion of the ECP market that is asset-backed has grown steadily to represent 13% of the total ECP market, the report said.
"More and more sellers are entering the market," said Annick Poulain, vice president and senior credit officer at Moody's Investors Service. "Several pools of trade receivables - originated by corporations in Continental Europe - have been added to European conduits in the last six months."
Credit volatility has resulted in continued downgrades of corporations, CDO transactions and, to a lesser extent, term ABS during the first six months of 2002, Poulain added. But so far, no ABCP program has been downgraded in the U.S. or in Europe - a testimony to the market's resilience.
This has proved to investors that structural features and diversification of exposure provide good credit protection. "For the most part there is flexibility in the structure, which allows the sponsor to replace a particular counterparty if there is a downgrade that will affect the program's rating," explained one market source.
The latest WorldCom scare showcases the ABCP market's strength. According to both Fitch and Moody's, at this stage it is unlikely that the situation will have a direct impact on Euro ABCP conduits. Fitch said it had recently completed a comprehensive review where it found no direct exposure to WorldCom and only limited exposure in CDOs. "I do not expect the WorldCom situation to have an impact on the European ABCP market," one source said. "But in terms of exposure, this may not be a very relevant question for ABCP, but rather an issue more relevant to CDOs."
WorldCom financed a $1.5 billion trade receivable facility through a club U.S. ABCP deal. As of June 28, 2002, the entire balance of the securitization has been assigned to liquidity banks supporting these ABCP programs. According to Moody's, there has been no indication of deterioration in the performance of the receivables. Still, all of the associated ABCP was paid in full, and none of the programs required a draw under its program credit enhancement.
Despite the growth of the market, Euro ABCP has yet to reach the size of the U.S. market ($731 billion as of the close of the first quarter 2002). Two-thirds of the paper issued by European conduits is placed in the U.S. CP market.
"The uncertainties with regards to future regulatory treatment in respects to liquidity facilities are probably slowing down the growth of the ABCP market," said Poulain. The tentative Basel accord requirements may introduce a 20% credit conversion factor for liquidity facilities that, if passed, would be implemented in 2006. These are currently zero weighted, and the change could potentially be expensive, as it would require that conduit sponsors set capital against liquidity facilities.
Still, new programs are being established and sponsors are, as a result of the uncertain regulatory environment, becoming more innovative with structures as a means to reduce liquidity coverage of the ABCP programs.
In France, for instance, two new conduits came to market during the first half of 2002. The latest is Direct Funding - a partially sponsored multi-seller program set up by CDC Ixis Capital Markets. Here, the ABCP proceeds are used to fund cash collateral remitted by Direct Funding as security on credit derivative transactions.
According to a Moody's report on the deal, if the ABCP cannot be rolled over due to a market disruption, the release of cash collateral by CDC ICM on the ABCP maturity date will be used as funds to repay investors. This mechanism makes cash available for liquidity purposes much like a conventional liquidity facility.
Going forward, expect to see a growing number of utility receivables transactions from electric, water and waste utilities. "We also expect to see transactions currently refinanced in ABCP conduits to be issued as term transactions in the near future," Poulain said.