This year, growth in the European ABCP market was primarily concentrated among existing conduit programs. This increase in volume, particularly in European commercial paper (ECP) issuance, has provided some encouraging signs for what's in store going forward.

According to figures released in a JPMorgan Securities research report, ABECP outstanding has exceeded US$80 billion with over 50 active programs, and represents over 22% of total ECP issuance this year. JPMorgan shows that last year ended at US$58 billion, and in 2001, volume stood at US$31 billion outstanding.

"Everybody is very excited about the growth that we have seen this year," said one market participant. "It's a bit of a virtuous cycle - the more that's issued the more people are comfortable with liquidity. They like the fact that ECP is not multi-currency so there is no need for a (currency) swap (as in U.S. CP),"

The market has benefited from lifted restrictions on investments in sterling (2001) and, consequently, about 60% of the market is euro-dominated and 20% to 25% of the market sterling-based, followed by U.S. dollars. "ECP is on demand; investors have liked the ratings stability and issuance stability ... and at the same time investor analysis is becoming more sophisticated - buyers understand these structures more," said one market analyst.

Not unlike the story in the U.S., European players, however, are dealing with potential regulatory changes, particularly in terms of capital adequacy. "A lot of work has been done to amend features according to FIN 46 and FAS 140, as well as for the Basle Accord's treatment of liquidity facilities," the analyst said. "So much of the conduit work was tweaking or restructuring existing programs and refinancing as opposed to seeing volumes increase from new deals."

According to panelists at a recent European ABCP industry conference hosted in London by Moody's Investors Services, while the risk of a CP market disruption has been limited over the years, the market continues to see the availability of traditional sources of liquidity limited by the proposed revisions of the Basle Accord along with those proposed under the U.S. risk-based capital rules.

The threat of increased liquidity costs has encouraged the market to develop structures that rely less on bank liquidity support. Since growth has remained exponential in Europe, demand has outpaced the availability of existing bank liquidity to begin with, and this continues to be a primary hindrance to the market.

Though new structures are being explored, only four of the 55 conduits rated by Moody's use alternative forms of liquidity.

Extendable CP notes, an option that has been used in the U.S. market for a number of years, is expected to become more common in Europe. According to Moody's, this strategy would likely marry best with assets like trade receivables or credit cards, which tend to come with a quicker payment rate.

ABN AMRO initiated the use of extendable notes earlier this month through its Tulip conduit program. Tulip's extendable notes will have expected maturity dates of up to 180 days and final maturity of up to 365 days. The liquidity notes will be repaid on their expected dates unless extended by the conduit. However, according to Moody's analysts, Tulip will continue to be fully supported by the liquidity lines provided by ABN. With the option to issue extendable notes, it's less likely that the program would opt to draw on these facilities should a credit event occur.

"European banks have always been involved in conduits, but the thinking in the past has been focused on U.S. products," said one market source. However, the drop-off of activity in the States has inspired ECP issuance. Simultaneously, U.S. programs are more often equipped to issue euro CP.

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