Asset-Backed Commercial Paper Market Overview

Abridged from Moody's Third Quarter Asset-Backed Commercial Paper Market Review, by Annika Sandback, vice president and senior analyst.

Average daily ABCP outstandings for the second quarter of 1999 rose to a new high of $432 billion. Although this figure represents a relatively sluggish quarterly growth rate of 6%, historically the second quarter tends to be the slowest-growing quarter in the ABCP market. For example, the growth rates in outstandings in the second quarters of 1998, 1997, and 1996 were 5.4%, 6.7%, and 6.8%, respectively.

However, on an annual basis, outstandings increased by 52.1%, from $284 billion in the second quarter of 1998 to $432 billion in the second quarter of 1999. This figure compares with a growth rate of 51.3% for the four quarters up to and including the first quarter of 1999.

Changes In The Abcp Market's Program And Asset Mix

While the ABCP market continues to boom, the complexion of the market - both in terms of program type and asset type - is also changing at an unprecedented pace, with some dramatic changes occurring over the past 18 months.

Changing Program Mix: Securities Arbitrage

Programs Of New

The largest change in the ABCP market's program mix over the past 18 months has been in the securities arbitrage segment. Although in terms of outstanding ABCP securities arbitrage programs increased only four percentage points - from 9% of the market in September 1997 to 13% in June 1999 - this is the fastest growing segment of the market. What the statistics mask is the acceleration in the number of new programs established in 1998, which has reached a fever pitch in 1999.

Citibank pioneered the securities arbitrage segment of the market, establishing Alpha Finance Corporation Limited in 1988 and Beta Finance Corporation & Beta Finance Corporation Limited in 1989. The next new securities arbitrage program was established in 1993, followed by three in 1994, and five in each of 1995, 1996, and 1997. Growth took off in 1998, when 12 programs were established, and continued with the establishment of 10 programs in the first two quarters of 1999.

As the newer securities arbitrage programs begin to issue paper, Moody's expects this segment of the ABCP market to become a much larger percentage of the total, in terms of outstandings.

Fully Supported, Multiseller Programs,

Increasingly Expensive

The second significant change in the ABCP market's program mix occurred in the fully supported, multiseller segment, whose share has decreased over the past 18 months fairly dramatically, from 19% to 12% of the total.

One cause of this decline is the continued efforts of ABCP program sponsors to cut costs. The reason for this is simple: Most program sponsors continue to provide the majority of liquidity and credit enhancement for their programs. Therefore, a program which receives full support from a liquidity facility provided by the sponsor bank typically attracts an 8% capital charge for the bank against the full amount of the liquidity facility. This charge renders it uneconomical for most banks to fund a large amount of assets through a fully supported program.

Those programs that receive full support from a structured liquidity facility and do not attract a capital charge for the provider of that support facility may raise another concern for the program sponsors: Potential regulatory changes could require capital to be held against these facilities.

Changing Asset Mix

There have also been some big changes in the types of assets funded by ABCP programs in the past 18 months: a dramatic growth in collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs), and a sharp drop in trade receivables.

CLOs/CBOs: Many Financed By ABCP Programs

CLOs and CBOs, collectively referred to as collateralized debt obligations (CDOs), are the hottest asset type in the ABCP market today. For example, for the top 20 partially supported multiseller programs, the CDO segment increased from 2% of outstanding ABCP in September 1997 to 12% in June 1999. As with the figure for the securities arbitrage segment's share of the market program mix, this 12% figure is grossly understated. There are a few reasons for this: The figure represents only those CDOs that are funded by the 20 largest partially supported, multiseller programs when, in fact, almost all ABCP programs own CDOs, including many securities arbitrage programs. In addition, some programs that do not fit into the partially supported, multiseller segment of the market have been established specifically to purchase CDOs.

The primary driver behind the financing of so much of the CDO market via ABCP is that the spread between what a conduit can receive on a CDO and the conduit's cost of funds has been relatively wide. In fact, because the cost of funding CDOs in the ABCP market is so much less than it is in the term ABS market, some issuers of large bank balance sheet CLOs have chosen to fund them through their own conduits. Examples include CIBC's own $4.6 billion CLO funded through its SPARC conduit, and Bank of Nova Scotia's own $2.4 billion CLO funded through its conduit, Liberty Street.