ABCP - where we go from here_ABCP - where we go from here.ppt
- 1. 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. 2 Since the middle of July, the ABCP market – after reaching $1.5 trillion in global outstandings and representing almost half of the world’s CP markets – has experienced unprecedented retrenchment and been a focus of the financial markets Triggered by the U.S. sub-prime mortgage market difficulties and knock on effects throughout credit markets, certain ABCP programs and structures came under stress Conservative short term investors – concerned with capital preservation more than returns and cautious about potential investor withdrawals from their funds given negative and sometimes inaccurate press – pulled away from ABCP Scrutiny of short term fund holdings of CDO CP traunches and ABS contributed to defensive investing What’s happened?
- 3. 3 Interbank spreads to underlying rates widened as banks became reluctant to lend Banks have been uncertain as to what demands on their balance sheets might be and what exposures to bad credits might be at other banks It has been difficult to place CP in an environment where at times it has been difficult to price even one month LIBOR The chart below compares the front 3-month Eurodollar future with 3- month LIBOR Normally, the futures contract trades at a discount (no positive carry) until it converges with LIBOR at maturity, but given defensive lending the reverse has been true Uncertainty in ABCP has been part of a wider dislocation in credit and money markets Front 3m Euro$ future v 3m LIBOR -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 25/03/2005 25/05/2005 25/07/2005 25/09/2005 25/11/2005 25/01/2006 25/03/2006 25/05/2006 25/07/2006 25/09/2006 25/11/2006 25/01/2007 25/03/2007 25/05/2007 25/07/2007 25/09/2007 source: Bloomberg
- 4. 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 0 10 20 30 40 50 60 70 30/07/2004 30/10/2004 30/01/2005 30/04/2005 30/07/2005 30/10/2005 30/01/2006 30/04/2006 30/07/2006 30/10/2006 30/01/2007 30/04/2007 30/07/2007 source: Federal Reserve bps
- 5. 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 0 50 100 150 200 250 300 350 3 1 - J u l 1 5 - A u g 2 2 2 9 0 5 - S e p 1 2 1 9 2 6 0 3 - O c t source: CPWare $bn -40% -30% -20% -10% 0% $bn % drop US ABCP 1174 1135 1057 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. 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 $2.8 trillion Investors are beginning to re-engage ABCP and are differentiating between programs they are comfortable with and those that need further review Investors will confirm the structures they want to buy, work with issuers to “re-calibrate” others, and maybe reject a few altogether Traditional multi-sellers with full liquidity support from strong sponsor banks are now trading towards June levels Positives
- 7. 7 Programme mix might change in the future Moody's Rated ABCP Programs by type (global outstanding in US$ 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. 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. 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. 1 0 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. 1 1 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. 1 2 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!