Industry observers have a neutral outlook for the U.S. asset-backed commercial paper market for 2023.
With its heavy exposures to auto loans and leases, corporate and commercial loans plus trade receivables, the ABCP sector is facing deteriorating asset performance in 2023, Fitch Ratings said in a recent update. Assigned ratings on ABCP portfolios have held up, however, due to consistent credit quality.
The amount of asset-backed commercial paper outstanding was $1.1 trillion, according to Federal Reserve data posted Monday. Back in September outstanding commercial paper was up 9% for the year, thanks to an issuance surge that began in August.
"Volumes in ABCP were largely stable in 2022, a trend we expect to continue in the near term," Fitch analysts wrote in the outlook.
Banks sponsor ABCP transactions, typically, so their ratings—particularly liquidity support agreements that minimize investor exposure to problems in the collateral pools—drive the sector's outlook, according to Fitch. Also, transaction administrators are generally very experienced at running the deals throughout various interest rate and credit cycles—an advantage to ABCP portfolios now, considering that the U.S. economy is expected to experience a recession, amid rising interest rates.
Both the liquidity support and transaction adept administrators are expected to help ABCP in 2023, especially because underlying assets are expected to soften.
"Performance is expected to weaken more where there is an intersection of non-prime obligors and lower debt obligation payment priority," analysts wrote.
As for the first three months of the year, Fitch expects that institutional prime money market funds to experience bumpy inflows, but they could still see a 0.08% increase in total assets.
