NEW YORK - Investment banks providing repo - or repurchase - funding to clients via the ABCP market are looking for novel structures in order to take these transactions off balance sheet, sources said.
During the past year, repo financing ABCP programs have been driving growth in the market, and the trend is expected to continue in 2005, according to delegates at the Strategic Research Institute's recent Asset Backed Commercial Paper Summit here last week.
The most visible of these programs is the $20 billion Chesham Finance Limited vehicle administered by BSN out of London, which was launched in mid-2004. BSN launched a similar program, dubbed Ebury, earlier this year. While repo financing is nothing new - indeed, Bear Sterns has been operating a program of this kind for several years - it has only recently become more of a presence in the ABCP universe, and some investors are proceeding with caution.
"We only purchase one of these programs," said Natalie Metz, vice president and senior investment analyst at Federated Investment Management Co. "[Many] of these programs are administered by independent or non-bank sponsors...We want programs from experienced administrators."
Federated requires a rating from both Moody's Investors Service and Standard & Poor's, Metz added, which can be an obstacle for some of these programs. Additionally, several of the repo programs include the option to extend the paper beyond 180 days, another breach of the firm's investment guidelines. As several of these conduits are run out of the U.K., Metz advised a careful consideration of any differences between the U.S. and U.K. repo markets to check for discrepancies between the two that could be cause for credit concerns.
Despite the newness of some of these programs - and the lack of a bank sponsor, in some instances - the investment appears to be a very sound one, according to a least one source at a large investment management firm. "Overall, it's pretty stringent from a credit perspective," the source said. "A default on an agreement like this would be a big problem for the counterparty because of all the [International Swaps and Derivatives Association] agreements...A bank, for instance, is not going to default on this. It would be pretty dramatic if they did."
Faith in the counterparty is a crucial element of these programs, and some investors balk at being kept in the dark about exactly who those counterparties are. An assurance from the administrator that all the counterparties are A1/F1/P1 rated is not enough for some investors. "If you want me to take that risk, you should be able to provide me with more comfort than that," said one investor.
One potential pitfall could arise if certain counterparties no longer required financing, which could cause a steep - and rapid - decline in the administrator's portfolio. "Repo agreements are really short, and the size of a program could fluctuate dramatically if counterparties didn't need financing. There's some perceived operational risk with a situation like that," a source said, adding that an inexperienced administrator could be a liability in this situation.
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