Whenever U.S. rating agencies assess foreign asset-backed commercial paper programs, it is fair to assume that the sponsor is about to issue ABCP in the U.S.
Such hopes were raised in the ASR newsroom when Moody's Investors Service assigned Prime-1' ratings to five partially supported, multiseller ABCP programs sponsored by Scotia Capital and Royal Bank of Canada. Alas, at press time, RBC said it had no immediate intentions to issue ABCP in the U.S. market from its three newly rated conduits. Scotia Capital could not be reached for comment.
The reality is that U.S. investor demand remains very low for asset-backed commercial paper. As of Dec. 19, there was about $777 billion in ABCP outstanding in the U.S., according to figures from the Federal Reserve. That's a drop in ABCP outstanding of about 36% from a record high of $1.2 trillion in July 2007, said Fitch Ratings.
The market is very familiar with the main reasons for that precipitous decline: Nontraditional vehicles - such as those that issue asset-backed extendible notes and structured investment vehicles, mortgage warehouse and other market-value programs - disappeared from the market, as investor demand for the paper from those vehicles evaporated.
Investor demand is now just one of two major problems facing the ABCP market. Spreads to Libor have widened significantly, whittling away at the incentive for issuers to launch new vehicles. Before the market took a hit in August 2007, ABCP rates were tracking close to Libor, according to Fitch Ratings. Since then, however, ABCP rates diverged, caused by sudden fund outflows from the sector. From January 2001 to August 2007, ABCP spreads averaged five basis points below the one-month Libor. From the onset of the crisis through November 2007, spreads averaged Libor plus 21 basis points. Even under improving conditions, between September and November, spreads averaged 12 basis points over Libor.
Spread widening is not expected to affect ratings, because traditional programs - the ones left standing - receive full yield coverage on ABCP from bank liquidity facilities. Yet persistently wide spreads could sour the business relationship between conduits and the companies that sell their assets to the conduits, especially if the multisellers pass the increased cost of funding to sellers.
"To remedy generally higher and more unpredictable rates at various maturities, some multiseller conduits have switched to a pool funding, as opposed to a match funding, model," the Fitch analysts wrote. That strategy allows the conduit's traders and bankers to manage the sellers' funding needs in a way that avoids extremes. Still, the pool funding model does not remedy the underlying problem, and Fitch analysts say sellers might be tempted to turn to other sources of financing if ABCP pricing does not stabilize soon.
Now that the main troublemakers have exited the market, one would think that investors, sponsors and even sellers could find common ground on which to stabilize this important market. That, however, will not be easy, and there are now signs that ABCP issuers are being worn down by the instability. Very few new ABCP vehicles have been launched since August and many have unwound.
"I don't know of anyone setting up new vehicles in the world right now. Things have been ruffled," one seasoned market participant said. "Whether there will be new conduits in the future, I do not know."
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