NEW YORK - ABCP volume has topped the $1 trillion mark, a welcome update at the Asset Securitization Forum's annual meeting here last week. Such a showing, however, means that competition is increasingly fierce for investors and dealers. Also, as newer ABCP structuring techniques, such as extendible notes and structured investment vehicles (SIVs) continue to boost the market's volumes, investors will have to dedicate much more time understanding the deals and the managers who run them.
Fierce competition, particularly in the multiseller sector, has ushered in diverse models and new entrants, and in some cases for the better, said Eric Wise, a managing director at the Royal Bank of Canada. The lack of layering among deals, however, is a growing concern at the bank, he added.
"We think that perhaps some of the subtleties of these programs, which look very homogenous on the surface, are very different in the details [are being overlooked]," he said. For most of 2005 and all of this year, Royal Bank of Canada has been thinking about the modeling behind the new programs, and developing ways of protecting its business model, stay relevant to its client base and provide products that can be regarded and premier funding vehicles and stand up well if market downturns should occur.
In an effort to assure clarity for its investor and issuer clients, Wise said, the bank has been buying liquidity insurance and models that provide stability of funding. Still, the bank has had time to develop an ABCP innovation of its own. The bank recently launched a program called White Point Funding, which will give the bank exposure to structured credit in pure derivative form, said Wise.
"Our view is that there will be a greater convergence between the cash and derivatives markets," said Wise. The bank expects White Point Funding will ramp up to $1 billion in outstanding paper by October, after which it will begin executing derivative transactions.
"We're concerned, because we see a food fight in every asset-backed issue that comes to market," said Victoria Kess, senior credit analyst for New York City-based Western Asset Management. "Our next concern is ... will they go down in credit quality, just to be able to get into that market to get some growth in their conduit?"
That has prompted Western Asset Management to reinforce their surveillance to make sure the conduits are not reaching too low on the credit scale of what they are buying, said Kess. Still, she said, many securities are well priced, and investors continue to be careful when buying ABCP.
Another major event in the ABCP market, several professionals noted, was newer smaller entrants among ABCP programs, which are not traditional bank sponsors, said Deborah Toennies, a managing director at JPMorgan Securities. They include cashflow CDOs, SIVs from non-bank sponsors and cashflow extendible notes.
These changes have impacted investors the most. In previous years, when banks dominated the ranks of ABCP dealers, investors generally considered the bank's reputation first when judging the merits of the ABCP program. Not anymore, said Trisha Ostergaard, an executive director at Morgan Stanley.
"These [newer programs] now have non-bank sponsors, they have unbundled a lot of elements of the structure," Ostergaard said. Whereas banks would provide all of the major support for the programs, such as liquidity and credit enhancement, the more exotic ABCP programs have separate collateral managers, put providers and swap providers, among other parties, to manage the program.
"That means a lot more work for the analysts," Kess said. "We rely on one-on-one meetings with the managers ... to get more of a feel for the personality running the program. And their technology has to be at the top of the curve."
The market's newest ABCP programs are diverse, minimizing common themes among them, noted Kess. "Each stands on its own two feet," she said. "It's just a lot more labor intensive than it was in the past."
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