ABCP investors will adapt purchasing mandates to accommodate 'F2' rated paper as European ABCP conduits lose their 'F1sf' rating, said Fitch Ratings in a report today.
The ratings of ABCP programs are directly correlated to the banks that sponsor them. The most likely reason for a wholesale downgrade of ABCP conduits is a lowering of the sponsor banks' ratings.
Investors have typically been driven by mandates that require them to make Tier 1-rated purchases. However, in the face of continued downgrades, investors will likely change their mandates to be able to buy Tier 2 rated paper.
This change would limit the impact of downgrades on the $1 trillion global ABCP market and reduce concerns that an important source of funding for the real economy would be removed, according to the rating agency report.
Fitch estmated that only 31% of European ABCP conduits are 'F1+sf' now versus 53% before the financial crisis.
On June 21 Moody's Investors Service downgraded several large banks, including two major sponsors of ABCP, Citibank and Royal Bank of Scotland (RBS). Both banks had their short-term debt rating lowered to 'P-2' from 'P-1'.
The rating agency subsequently downgraded to 'P-2' the ratings of seven U.S. programs backing commercial paper as well as four U.S. programs backing letters of credit. The move affected roughly $37 billion of commercial paper.
Additionally, the downgrades impacted $30 billion representing three European programs sponsored by RBS and roughly AUD$ 1,608.35 million ($916.85 million) and £162 million ($251.8 million) of ABCP backed by RBS' Australian unit.
The shrinking universe of Tier 1 rated sponsors also means that investors will have to consider lower rated ABCP for capital and liquidity management because there are few alternatives large enough left at 'F1sf' ratings, Fitch said.
"Sovereign Treasury bills could provide an alternative for some, but that product's yields are too low for many ABCP investors," Fitch analysts said in the report.