NEW YORK - Although an occasional annoyance to investors, extendible ABCP is the inescapable future of the conduit market, according to panelists speaking at last week's American Securitization Forum Sunset Seminar dedicated to the topic (see Observation p 18-19). Recent technological advances offering significant economic benefits to issuers are seen spreading to new sectors, regardless of whether investors feel they are adequately compensated for a risk they consider too great for the reward.
"Still in its infancy," despite its rapid growth (extendible programs currently make up 11.5% of total ABCP), extendible technology is currently being incorporated in new asset classes and geographic regions. Panelists expect "several new programs from Europe," and Moody's Investors Service Senior Vice President Everett Rutan reported discussing its expansion into the student-loan sector.
"Exploration is needed," said Rutan. "Innovation is occurring."
Evidence of this innovation can be found in the newest programs to hit the scene, such as Barclays Capital's Stratford facility, the first multi-seller fractional liquidity program, aimed at funding trade receivables. Additionally, existing non-extendible programs are being converted to extendible status.
Barclays Director Fouad Onbargi said "traditional CP is uneconomic given the tight spreads for commoditized products," and "insurance costs for liquidity assurance is too steep," given the low probability of a liquidity shortage.
The main hurdle to expanding into new assets, according to Onbargi, is the ability to assess asset liquidity. Pointing to the developed whole loan market in the mortgage sector, rapid liquidation following an extension event would be needed to quickly repay investors. "A secondary market is needed to assess liquidity," Onbargi added.
But can overnight money-market investors afford to buy paper from a reduced liquidity backstop facility with the inherent risk of a period with no cashflows? They may not have a choice.
"It's a question of reputation, added Moody's' Rutan. "What happens should one extend? Would it spread?"
Panelists saw no end in sight for new extendible program launches and specifically noted the protections being built into new structures, including program-wide credit enhancement and surety wraps to ease investors worries.
Sean McCarthy, a vice president in Lehman Brothers origination team, explained that bank sponsors and administrators understand the doomsday scenario that would occur should an extension actually happen, citing two instances of potential extension where the resolution ultimately "gave soundness to the structure."
Without naming the facilities, McCarthy reported a counterparty downgrade and the discovery of fraudulent receivables in two separate programs. Each time the bank sponsor - as well as its competitors in the dealer community - stepped in to rectify the situation and prevent the extension. "Banks have an overwhelming disincentive to allow [an] extension," McCarthy added.
Barclays' Onbargi cited the more stringent credit qualifications for assets being sold into new programs. Additionally, "extension triggers are set so wide as to make extension unlikely."
When a buyside audience member asked what the dealer community would do should ABCP investors step back from extendible programs and move their money elsewhere, the panelists seemed unconcerned. "Some 2a7 investors may step back, but relative value investors may increase exposure," said fellow buysider Tim Wilson, portfolio manager at Credit Suisse Securities Lending.
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