NEW YORK - Despite regulatory uncertainty, the ABCP market is currently showing a record $775 billion in outstandings, according to statistics from the Federal Reserve. Growth in the whole loan mortgage sector and increased interest on the part of CDO managers in conduit funding are expected to fuel the creation of new ABCP programs in 2005, market sources said.
"Reports of the death of the ABCP market have been greatly exaggerated," said Maureen Coen, managing director and global head of ABCP origination at Credit Suisse First Boston, paraphrasing Mark Twain during the opening panel at the Strategic Research Institute's Asset Backed Commercial Paper Summit held here last week.
There were 46 new programs launched in 2004, Coen noted, of which 36 are still operating. Whole-loan mortgage originators alone are expected to account for at least six new extendible programs in 2005, she added, including a few new single seller programs.
CDOs are another growth opportunity for conduit administrators as more collateral managers turn to the ABCP market for financing, panelists said. The CDO sector accounted for 13 new programs in 2004, said Citigroup Global Markets Managing Director Randy Harrison. By Harrison's count, multiseller programs accounted for another 13 new programs, alongside 10 new securities conduits, five new single seller programs and two labeled "other".
Separately, roughly 40 extendible ABCP programs now account for over $80 billion in outstandings, Harrison said.
The creation of new programs by independent sponsors has left investors with additional homework, said Barbara English, director of fixed income research at UBS Global Asset Management. UBS' analysts are already familiar with bank sponsors, and do not need to dedicate the additional time to them that they do to independent entities. Moreover, banks generally put a lot of credit enhancement - or the bank's money - behind the program, English added. "Independent sponsors get a higher level of scrutiny," English said. "It's important for independent sponsors to demonstrate what their vested interest is...What are they on the hook for?"
The growth in the CDO product raises other issues. "It is a bit of a challenge because of the broad range of collateral backing a CDO," English said.
Additionally, if any one CDO makes up more than 25% of a multiseller program, "long, drawn out discussions" become necessary, English said, and credit enhancement on the program should always be greater than any one CDO. The experience of the collateral manger is an important factor, she added, and there needs to be a regular flow of detailed information for the continuous monitoring of underlying assets.
Utilization rates
Utilization rates in multi-seller programs are a telling indicator of changing market dynamics, one banker said. The average utilization rate throughout 2000 and 2001 - and into the beginning of 2002 - was in the mid to low 80s, a sign that companies were using their warehouse facilities as a regular funding source.
However, utilization rates have been steadily declining for the past several years, which could mean that traditional finance companies do not have as great a need for funding. Alternatively, these rates could signify a switch to more economic term financing arrangements. What appears certain is that many large multi-seller players are now using ABCP conduits as "rainy day" funding, as opposed to using them for working capital, as had been the case in the past, the banker said.
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