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ABCP : Where do we go from here?
Sophie Berthelon, Moody’s Investors Service
Peter Eisenhardt, Bank of America
Jonathan Curry, Barclays Global Investors
Rob Koning, ABN Amro
2
Since the middle of July, the ABCP market – after reaching $1.5 trillion in global outstandings and representing almost half of the world’s CP markets – has experienced unprecedented retrenchment and been a focus of the financial markets
Triggered by the U.S. sub-prime mortgage market difficulties and knock on effects throughout credit markets, certain ABCP programs and structures came under stress
Conservative short term investors – concerned with capital preservation more than returns and cautious about potential investor withdrawals from their funds given negative and sometimes inaccurate press – pulled away from ABCP
Scrutiny of short term fund holdings of CDO CP traunches and ABS contributed to defensive investing
What’s happened?
3
Interbank spreads to underlying rates widened as banks became reluctant to lend
Banks have been uncertain as to what demands on their balance sheets might be and what exposures to bad credits might be at other banks
It has been difficult to place CP in an environment where at times it has been difficult to price even one month LIBOR
The chart below compares the front 3-month Eurodollar future with 3-month LIBOR
Normally, the futures contract trades at a discount (no positive carry) until it converges with LIBOR at maturity, but given defensive lending the reverse has been true
Uncertainty in ABCP has been part of a wider dislocation in credit and money markets
Front 3m Euro$ future v 3m LIBOR
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
25/0
3/20
05
25/0
5/20
05
25/0
7/20
05
25/0
9/20
05
25/1
1/20
05
25/0
1/20
06
25/0
3/20
06
25/0
5/20
06
25/0
7/20
06
25/0
9/20
06
25/1
1/20
06
25/0
1/20
07
25/0
3/20
07
25/0
5/20
07
25/0
7/20
07
25/0
9/20
07
source: Bloomberg
4
ABCP spreads over LIBOR gapped out while maturities shortened
In programs funding securities, ABCP costs exceeded asset yields and challenged some programs
Traditional multi-seller programs generally passed increased funding costs on to clients whose assets were being funded
Post-Fed rate cut, spreads have tightened considerably
1 mo $ ABCP vs LIBOR
-20-10
010203040506070
30/0
7/20
04
30/1
0/20
04
30/0
1/20
05
30/0
4/20
05
30/0
7/20
05
30/1
0/20
05
30/0
1/20
06
30/0
4/20
06
30/0
7/20
06
30/1
0/20
06
30/0
1/20
07
30/0
4/20
07
30/0
7/20
07
source: Federal Reserve
bp
s
5
Global ABCP outstandings have fallen steadily since the end of July to $1.099 trillion (-27%)
On 3 October, ABECP outstandings were $193bn (-35%) while US ABCP was $906bn (-23%) Part of the reason that ABECP
has dropped by a higher percentage than US ABCP is that European investors are less likely to buy short (1-7 day) paper that is now more prevalent
There are 20 ABECP programs with outstandings over $3bn, down from 31 at the end of July
ABECP
275 254 244 239 232 212 199 193
298
050
100150200250300350
31-J
ul
15-A
ug 22 29
05-S
ep 12 19 26
03-O
ct
source: CPWare
$bn
-40%
-30%
-20%
-10%
0%
$bn
% drop
US ABCP
1174 11351057 998 967 945 929 923 906
0
200
400
600
800
1000
1200
1400
31-Jul
15-Aug
22 29 05-Sep
12 19 26 03-Oct
source: Federal Reserve
-25%
-20%
-15%
-10%
-5%
0%
$bn
% drop
6
In September – a month of heavy maturities - conservative short term investors received their money on maturing paper as they reassessed
Issuers are paying off maturing paper by selling and rolling off assets, bringing assets back to sponsor balance sheets, drawing liquidity, and entering into repos
Identifiable, highly likely investor losses are limited so far
Money funds have not seen investor redemptions; on the contrary assets have increased with falling rates
U.S. money fund assets hit an all-time high of $2.8 trillion
Investors are beginning to re-engage ABCP and are differentiating between programs they are comfortable with and those that need further review
Investors will confirm the structures they want to buy, work with issuers to “re-calibrate” others, and maybe reject a few altogether
Traditional multi-sellers with full liquidity support from strong sponsor banks are now trading towards June levels
Positives
7
Programme mix might change in the future
Moody's Rated ABCP Programs by type (global outstanding in US$ as of June 30, 2007)
Multiseller; 44,88%
Single-Seller; 15,61%
Sec. Arbitrage; 13,16%
Hybrid; 11,84%
SIV; 7,13%
Other; 7,05%
SIV LITE; 0,33%
Source Moody's Program Index June 2007
8
Programme mix might change in the future
Growth by Program types between March 06 and June 07 (Moody's rated ABCP Programs globally)
0
100 000
200 000
300 000
400 000
500 000
600 000
700 000
Hybrid Multiseller Other Sec.Arbitrage
Single-Seller
SIV SIV LITE
March 06
June 07
+55%
+35%
+132%
+16%
+17%
+47%
Source Moody's Program Index March 2006 and July 2007
9
Liquidity backing will be important when investors assess ABCP programs going forward, as there must be means to repay paper if it cannot be rolled
Investors will re-focus on the institution(s) providing liquidity and whether the size of the commitment is
appropriate for these institution(s) confirming that there are no easy “outs” to providing liquidity extendible features by which the issuer can extend the maturity of the paper
the $150bn+ extendible market that developed in the U.S. saw paper extend although investors had viewed this as never likely
If program liquidity is less than 100%, repayment must also come from sale of assets and/or capital. On “Market Value” structures, investors will re-scrutinise asset Type Concentrations Valuations and
program leverage and funding
Liquidity
10
Some have suggested that insufficient information and lack of transparency in ABCP and conduit structures are the main elements in recent events affecting the market - this is not the case
Portfolio managers and credit teams have access to information memorandums rating agency reports conduit-issued “pool reports”, which broadly describe current assets and
verify compliance with program requirements
Frequent and regular conferences are hosted by the industry and rating agencies, often at no cost to investors Issuers have always been keen to meet investors to answer questions
Transparency
``I think there are some investors not doing the work and relying on ratings. If you're willing to do the work, it's there.''
- money fund investor
11
However, transparency can always be improved
Issuers, rating agencies, and dealers are keen to help in any way possible
Some investors may conclude their approval of ABCP was too ratings-based the market will work to help these investors perform the necessary
analysis
Parties not previously focused on ABCP, such as investors in money funds, will be provided with information and education as required
Transparency (con’t.)
12
ABCP issuers benefit from capital efficiency regulatory relief diversified funding
Structured Investment Vehicles (assets down from over $380bn to under $360bn) and securities arbitrage conduits are important buyers of ABS and other term product
Investors benefit from wider product offering competitive returns credits with a defined purpose and strategy that can be analysed steady supply
The global implementation of Basel II will be more important than ever
ABCP has a purpose and a future!
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