The European asset-backed commercial paper market ended on a high note, as a final thunder of issuance rocked the last five months of the year. Moody's Investors Service has given a positive outlook for the sector going forward.
For the third consecutive year, the European ABCP market experienced significant swelling with volumes reaching $136 billion. Counted within this figure were six new conduits: Premier Cru sponsored by ABN AMRO; Arabella sponsored by Hypovereinsbank; Altitude Funding Ltd/LLC sponsored by CDX Ixix Capital Market; Eurefin sponsored by Gerling; Quasar sponsored by KBC; and Solitaire sponsored by HSBC. And though the number of new conduits is below figures for 2000, last year's deal size trended upward.
According to Moody's, while highly rated securities purchases and CLOs were primarily responsible for the volume increase, a good number of trade receivable transactions continue to be executed and make up a large share of the conduits portfolios. Trade receivable deals were either issued globally at extremely large amounts - over EURO500 billion in size - or small deals that were originated by small and middle market sellers.
In 2002 Moody's expects to see new sponsors that might include Greece and South Africa as first time market participants, as well as conduits originating in Spain and Germany. "If the trade tax issues in Germany are resolved, the market is expected to take off," said one panelist at the year-end European ABCP conference hosted by Moody's. Panelists estimated that the German market should see a change by third-quarter 2002.
Still, a slowdown is expected in new sponsors, particularly because the market will be focused by the profit returns of conduits.
"The typical ABCP sponsor is a commercial bank," reported Moody's. "Faced with growing competition and the economic slowdown, sponsors face the pressure to increase [return on equity]. Going forward we believe that banks will be increasingly reluctant to continue any activities which do not offer a favorable risk-return correlation."
Conference panelists cited that, as a result, the situation would create opportunity for alternative sources of financing among non-bank sponsors that could include insurers, credit insurers, and investment mangers.
However, even as investors become more comfortable with European ABCP programs, growth could still face pressure unless regulatory hurdles are addressed, said one market source. "The main hindrance for European commercial paper market is the whole idea of same day settlement and this usage directive, where countries are trying to harmonize investment rules," explained the source.
With several countries still disregarding commercial paper as an eligible investment, it is difficult to realize the potential of future programs, he added.
Nevertheless, same day settlement is expected to find resolution by second-quarter this year. "It would be a European passport for investment managers to invest in commercial paper among other things," said the source.
Liquidity, Liquidity, Liquidity
Liquidity provisions continue to strain issuance, and, as fewer banks willing to provide lines of liquidity, the pressure augments to design alternative structures. However, there are hints that rating agencies may be are willing to bargain with the pre-requisite 100% liquidity, particularly because, to date, not one conduit has had to draw on the full amount, said one panelist at the conference.
According to Moody's, the proposed changes to the capital adequacy standards of the 1988 Basel Accord may have significant impact on the economics of the European ABCP market because it will have an effect on the cost and availability of liquidity facilities. Moody's reported, "All ABCP conduits mat face pressures unless the increase in capital charges may be passed on to the underlying seller of the receivables."
Under the terms of this new proposal, short-term liquidity commitments could be treated as residual credit risks and may expose liquidity banks to a 20% credit conversion factor. In response Moody's assess that the market may experience growth in more complicated structure, increased use of liquidity forms that depend on the conduits' underlying cash flow and asset value, and non-bank financial institutions expanding their role as liquidity providers. "A reduction in the number of transactions which are fully supported through liquidity facilities has already been seen in 2001," Moody's said.