At Information Management Network's first Cross Atlantic ABCP Summit held earlier this month, market panelists remained optimistic that, once the dust settles, investors will come back to the European ABCP market in greater numbers.
On the issuer side, there remains a willingness to keep bringing deals to market, particularly with regards to multiseller conduits.
Kevin Hawken, a partner in the finance group at Mayer Brown and a speaker at the conference, said that the market has seen sponsors making first efforts toward setting up new programs to sell ABCP in Europe over the last year. However, programs to sell U.S. ABCP have received more inquiries. He added that the market is still very much in a wait-and-see mode.
The financial markets must be more stable for ABCP conduits to stage a return. "We have a situation where investors and money funds are flooded with cash, but there isn't a lot of incentive for investors to buy," a market analyst said.
Creating the stability that would allow a return in confidence would require the success of two key processes:
For starters, panelists said that more transparency by way of standardized reporting would potentially reduce the market's current bottleneck. Panelists also said that headline risk and negative publicity needs to be reduced to regain investor confidence.
"We need to convince the market that ABCP is not a toxic waste," said R. Oliver Furst, senior managing director, head of structured products, Europe at State Street Bank & Trust, who was also a speaker at the event. "In many cases, we are having good discussions regarding the assets in the structure, and investors see the strength, but the headline risk turns them off."
There also needs to be much more flexibility in terms of funding, and simplicity in the structuring programs. The panelists also highlighted the importance of timeliness, or that reports are received early.
In July, Fitch Ratings reported signs that some multiseller programs were continuing to originate new transactions.
However, Emma-Jane Fulcher, head of ABCP at the rating agency, said that time consuming delays for getting approval have hindered the process, and few investors have dedicated ABCP analysts in place to help accelerate this tedious process.
The panelists also noted that the European paper that has had trouble finding funding has really come from the SIV side; multiseller and credit arbitrage vehicles have performed well. "The problem that we've had in Europe is that most investors have made very little distinction between the different categories," Hawken said.
The trauma has been felt more acutely in the European ABCP market compared with the U.S., because U.S. regulators have historically been more stringent with regard to money funds. Anecdotally, there is definitely a difference in what these funds can buy on both sides of the Atlantic, Hawken said.
Some European money funds, for example, are holding products that would not be eligible in 2a-7 funds in the U.S., specifically in terms of maturity. Under the 2a-7 standards, funds can have a maximum weighted average maturity of 60 days. These attributes give comfort to U.S. investors in that they know exactly what they are buying, a confidence boost that is lacking in Europe, where boundaries are blurred.
In Europe, triple-A-rated funds can provide high-quality, diversified and liquid structure for operational cash, from overnight to as long as three months, targeting a return around overnight Libor. But these funds can also offer enhanced yield or the option of a short duration bond fund that holds a larger proportion of ABS, MBS or corporate floaters.
The pitfall, Hawken said, would come if European regulators overreact and suddenly money funds in Europe become overregulated, which wouldn't be good either.
(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.