Players in the asset-backed commercial paper market have learned their lessons from the financial crisis and are ready to apply them in the wake of bank downgrades by Moody's Investors Service.
Participants at Information Management Network’s and Association for Financial Markets in Europe’s Global ABS 2012 conference said they are thinking of ways to enhance their ABCP programs.
At a panel on the sector, Edward Weber, a managing director at Nordeutsche Landesbank Gironzentrale, said his firm is considering issuing longer-dated paper -- as long as two- or three-years. However, the firm is currently in discussions with investors and is still in the process of determining how much demand there would be for paper with this tenor and how it could be priced.
Nord/LB has not issued overnight paper in two years. Weber said that the 2007-2008 financial crisis, which saw short-term financing disappear, prompted the firm to explore more medium-term note issuance. However, ABCP investors, who would have to do more upfront work with this type of product, would need to get comfortable with it, and to deal with customized documentation.
On the issuance side, Weber said it becomes a balance between financing certainty and issuance cost.
With banks’ ratings varying over time, Weber said that the might be room for a lower-rated, ‘A2’/’P2’ component of the market and for alternatives such as collateralized commercial paper.
Weber’s remarks reflect that fact that, in Europe, ABCP conduits are typically fully supported by a bank sponsor, often with a line or letter of credit that can be used to ensure repayment of paper if there are losses on the assets used as collateral or if the paper can't be refinanced. If the bank providing this support is downgraded, the ratings of the ABCP it supports may be affected as well. With the increase in bank downgrades, the universe of ‘P1’, ‘A-1’, or ‘F1’ -rated ABCP has shrunk as well.
In a separate interview, an ABCP rating analyst said that the move toward the issuance of medium-term notes might be driven by the desire to cater to investors such as money market funds that can only invest in ‘P-1’, ‘A-1’, or ‘F1’ paper. Medium-term notes can achieve long-term ratings of ‘A’ or ‘A2’ and above, which still fall within the ‘P-1’, ‘A-1’, or ‘F1’ rating scale.