It has been the general consensus that asset-backed commercial paper (ABCP) has left its impact on the first half of 2000, with more good times ahead, as an increase in securities arbitrage programs and ABCP volume is expected going forward, market sources say.
According to a recent report by Fitch, Asset-Backed Commercial Paper: Trends and Advances, the total volume of ABCP exceeded $570 billion for the first half despite the much anticipated Y2K complications that never surfaced.
However, some players in the market seem to express mixed reviews on whether or not commercial paper will continue to experience the growth rate that it has seen recently.
"I think the pace of growth will still continue in a positive direction, but the pace won't be as great compared to the same time last year," said Deborah Seife, an analyst at Fitch.
The reasoning for this hypothesis, Seife said, is that many of the larger banks that are major players in the sector and that normally establish new conduits have already done so in the first half of the year.
"We're seeing fewer new entrants into the market to boost up outstandings but we are seeing an increase in the outstandings of existing programs," she explained. "It's not increasing at the same rate. We're still getting new players, just not at the same rate. If you look at the outstandings every month, it's always increasing...just at a slower rate."
"I would anticipate that there will continue to be some new conduits established," said Thomas Fritz, a managing director at Standard & Poor's Ratings Service, on the issue of whether or not new ABCP programs will be established. "They may not necessarily be straight multi-seller conduits. They may be combination programs that are multi-seller arbitrages that are trying to do everything. To the extent that banks or the sponsors need to have a different name for their internal lending units, they are going to create conduits to satisfy those needs."
Sam Pilcer, a managing director at Moody's Investors Service, also felt that a change would not be seen in ABCP activity going forward.
"The numbers don't seem to be going down at all, they seem to be going up," he said. "More people are starting up programs and there is much more going on in the securities arbitrage world."
The first half of the year also brought new innovations, such as the widely and highly touted Citibank North America Eureka Securitisation Plc ABCP program, that was established with the idea of creating less than 100% third-party liquidity.
Both Seife and Pilcer were in agreement on the issue of whether or not more innovations would be seen regarding ABCP conduits.
"We're certainly fielding inquiries so it will be interesting to see how many of them actually get done," Seife said. "I think there will be a handful of conduit sponsors who will pursue innovative structures like Eureka did. At this point it's not really an option for every player. There are so many factors that bear on who might be appropriate for those kinds of innovations."
Pilcer feels that more innovative conduits may be developed in the future but that the market won't see any sight of them before year-end.
"We're working on situations like that, I just don't think that they will get done by the end of the year," he said.
More recently, Citibank proposed a reduction in required third-party liquidity support to a dynamic amount that takes into account the liquidity gap, CP and medium-term note maturities, and certain portfolio characteristics - creating the bigger issue of whether or not other conduits will follow the example created by Eureka.
"The changes to Eureka were for a particular set of circumstances to Eureka," Fritz explained. "I think it opened the door such that we're going to see more proposals - we already have proposals in house - for less than 100% liquidity. Now whether those actually reach fruition or not, I couldn't say. But it has certainly spurred the imaginations and interests of the bankers."
Another hot topic in the ABCP market these days is the development of conduit-sponsored Web sites. The web sites will provide investors with more timely performance and portfolio data, including portfolio characteristics, counterparty rating updates, and compliance with relevant triggers, convenants, and stop-issuance event scenarios, as well as the Securities Exchange Commission (SEC) Rule 2a7 compliance. This will allow administrators to make information about their ABCP conduits more readily available.
To date, there are several Websites that have been established by companies such as J.P. Morgan and The Liberty Hampshire Co.
"A number of players are working on it," said Seife. "Investors certainly feel that the more information available to them the better. There are certainly issues about data integrity and the ability to keep it current. Any of the issues that relate to maintaining a Website are also relevant here. Generally, the investors are receiving it positively."
