There is no rest for weary U.S. ABCP market participants who have been 'up against it' almost non-stop for the past five years. For a product that enjoyed relative anonymity and little interference for the first couple of decades of its life, its late twenties have been incredibly dynamic as the landscape changed dramatically in the wake of the global credit crisis. The ABCP market of today continues to contract and there has been no shortage of challenges in 2012.
ABCP issuers and investors are still contending with a seemingly endless list of changing banking and money fund regulations that were born out of the credit crisis. Market professionals work tirelessly through this while at the same time trying to manage the lending business and allocate funds in an increasingly precarious global economic environment.
Though the market has declined significantly, ABCP maintains an important position in the short term capital markets. Fitch reports approximately $309 billion in ABCP outstanding as of July 2012 (on a non-seasonally adjusted basis according to Federal Reserve data. This represents roughly a 74% decline after peaking at $1.2 trillion in July 2007. The steepest market declines in 2008 and 2009 were largely the result of non-traditional program structures, including market value programs and SIVs exiting the space. To compare, the total U.S. CP market (corporate and ABCP) has contracted approximately 54% since peaking in July 2007 at $2.19 trillion.
Sponsor banks with the economic scale to manage them efficiently, still view their ABCP product as one that offers low-cost, variable funding to customers that might not otherwise be able to issue commercial paper.
The ABCP market also provides an alternative to direct debt issuance and term asset-backed securitization. Investors are grappling with potential changes to Rule 2a-7 and the restrictions it demands. That said, many large money fund investors understand that ABCP is a viable offering and provides diversification relative to other short-term debt products.
Traditional multiseller ABCP programs proved resilient through the crisis and performed well from a rating perspective. Bank sponsors terminated many noncore banking relationship lines and cleansed or restructured unfavorable asset types from their portfolios. They remain focused primarily on providing cost-effective short-term financing of select asset types to key customers through their multi-seller conduits.
Since the beginning of this year, U.S. ABCP outstandings have declined approximately 12%. The drop in outstandings through the first half of this year is attributable to a combination of economic forces, bank balance sheet positions, regulatory stresses and the winding down of the Straight-A Funding, LLC student loan ABCP program.
Banks have been under heightened pressure and scrutiny for the past couple of years, most recently by Eurozone debt concerns. This coupled with continued concerns in the U.S. debt markets have resulted in a gradual decline in U.S. ABCP outstandings.
Banks are also relying more and more on an abundance of low cost, short-term deposits to fund customers making their ABCP vehicles a relatively less attractive financing alternative.
Straight-A Funding, LLC (Straight-A; rated 'F1+' by Fitch), has been winding down since making its final student loan asset purchase in June 2010 with outstandings currently at $23 billion. During the first half of 2012, a number of larger transactions have been refinanced out of the conduit and into the term ABS market. At its peak, Straight-A program outstandings were approximately $40 billion or almost 10% of the entire U.S. ABCP market.
Finally, the changing regulatory environment is taking a toll on the ABCP market. ABCP has been affected by new and more stringent regulations that will continue to impact conduits from an issuer and investor perspective. Many issuers have been working very hard over the past couple of years to ensure that ABCP survives new regulatory schemes. Additionally, others have either consolidated their ABCP business, limited their portfolio activities, or abandoned the market altogether. Uncertainty surrounding the regulatory environment may, in turn, lead to a further consolidation of ABCP programs.
The decline in ABCP market outstandings should not be considered a reflection of the credit worthiness of the ABCP programs themselves. In fact, subsequent to its annual review of ABCP conduit programs in March, Fitch affirmed the ratings assigned to the notes issued out of 28 of its U.S. rated ABCP vehicles, with total outstanding at the time of approximately $145.31 billion. During its ABCP reviews, Fitch evaluates counterparty exposures, imbedded structural protections, and collateral risks for each of the programs it rates. Structurally, the ABCP programs remain on very solid footing and no major shifts in asset allocation or counterparty exposures were observed.
Going further back, Fitch has not downgraded any multi-seller ABCP programs for credit reasons related to the underlying assets. Additionally, no traditional ABCP multi-seller investors have suffered a credit loss or payment delay from a Fitch-rated vehicle even as the credit crisis hit a crescendo.
ABCP-related rating actions, if taken, will most likely reflect the health of conduit sponsors, liquidity and credit enhancement providers, and other relevant counterparties. Fitch monitors counterparty risk on a daily basis. Performance measures are expected to be stable for most commercial and consumer asset classes. Thus, rating actions are expected to be limited, especially for the senior tranches typically funded through ABCP conduits.
In September 2011, as part of a series marking the fourth anniversary of the global credit crisis, Fitch published 'Traditional ABCP Survives Crisis Bruised but Intact'. In it, Fitch discussed the global ABCP markets before, through and in the aftermath of the events. It and Fitch's 2012 Outlook: Global Asset-Backed Commercial Paper include more detail on the ABCP market and provide a global perspective.
Looking further out, some participants and market watchers will question whether these developments foreshadow the demise of the U.S. ABCP market. While Fitch believes that scenario to be highly unlikely at this time, the ABCP sector appears to have no immediate relief in sight.
Kevin Corrigan manages Fitch's U.S. ABCP ratings group.
Michael Dean is head of Fitch's U.S. Consumer ABS and ABCP ratings groups.