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

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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

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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

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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

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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

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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!