Supply, or lack thereof, has been one of the biggest challenges in the money fund industry in recent years. An expert panel of dealers at the 6th annual Crane's Money Fund Symposium took a closer look at supply and new products found a few rays of hope in an otherwise dreary environment. "Since 2008, supply is down $2.5 trillion. I think we know that supply is an issue in this market, but there can be some bright spots and changing in complexion," said Dave Sylvester, head of money funds at Wells Fargo Advantage Funds and moderator of the session, called "Dealer Panel: Supply Outlook, New Products." Sitting on the panel was Stewart Cutler, head of originations at Barclays, Ron Flynn, executive director, J.P. Morgan Securities, and Jean-Luc Sinniger, director, Citi Global Markets. (Attendees of Money Fund Symposium and Crane Data Subscribers may access the Conference Downloads -- the full binder, recordings and Powerpoints here.)
One of the potential bright spots discussed was a new commercial paper program issued by Apple that had no backstop facility. Is this a growing trend? "That is a corporate program where the issuer did not have to seek a backstop liquidity from a bank, essentially, the liquidity is provided through the cash sitting on the balance sheet of the issuer," said Sinniger. "That is quite exceptional, but it is not unique. Usually, there needs to be 100% backup liquidity of some sort for CP outstanding. In most cases, for corporate issuers, that liquidity is provided by bank lines. I don't necessarily think that program is announcing any kind of new trend although it would be nice because that would provide some relief for banks which liquidity is scarce and sometimes it will be difficult to get the backup client."
Added Flynn: "I think it's helpful on the margin, but is that enough to drive more corporate issuers into our market? I think the answer to that is no. The Apple situation is not unique, but it's still interesting when a client can come without any committed bank backstop. We do think corporate CP outstandings are going higher. We certainly expect to see continued growth in that space."
Sylvester asked the panelists to talk about the advantages and disadvantages of direct issues. "Over the last 12 month we've seen two large issuers who have elected to stop issuing directly and to distribute their paper through dealers," said Cutler. "From their perspective, the dealer service distribution capability, low fees, and value added was really a better strategy than supporting a direct issuer desk. It wouldn't surprise me over the next 12 months if we see others abandon the direct issue format in favor of dealer distribution. That's more for the non-financials. As for the advantages there may be an opportunity to eliminate the dealer fee and then get a slightly higher yield in terms a direct transaction." He added: "The benefit of going through the dealer community is the ability to obtain price guidance and other market intelligence as to where other issuers are getting priced and volume executed on a daily basis. To some degree, going directly to investors inhibits that free flow of information."
Flynn discussed growth in other areas. "The callable puttable market has grown quite substantially in its popularity. The numbers are modest at this point, but we certainly do expect this to be an area for growth." In the callable market, there has been $46 billion issued by 7 banks and 2 conduits year to date, he said. Deutsche Bank, Credit Suisse, and UBS are the top three banks. In the puttable market there has been $15 billion issued by 8 banks and 4 conduits, Flynn added. The three largest issuers are Societe Generale, Deutsche Bank, and UBS.
Sylvester asked the panel about products that might help money market funds maintain a stable yet variable NAV in a rising rate environment, given that rate increases appear to be on the horizon. "Floaters may come back into mode as we go forward into a rising rate environment," said Cutler. "Many of our issuers are right now checking to make sure they have the flexibility to issue floating rate notes should we get into that rising rate environment. They are more likely to maintain a stable price during a rising rate scenario then straight fixed rate paper especially if its 90 or 180 days. The second might be the puttable product. The final product I would point to is the new 2 year floater," he said. That is a product designed to maintain par value as rates are increasing, he added.
There was also some discussion of the Federal Reserve's reverse repo facility. Said Flynn: "I think it's fair to step back and to talk about the different levers the Fed can pull to change the complexion of that facility -- first and foremost is price, second is the approved counterparty list, three is the counterparty limits, how much can each fund or counterparty take out of the facility, and then the aggregate limit to the facility. Clearly what the fed will do will be dictated by the market or conditions at the time and their ultimate objectives."
"The Fed looks to this facility very much as a stabilizing force. It's not viewed to be a destabilizing force and they've got plenty of time and they are being very thoughtful and deliberate and I think that's exactly how they'll proceed. If they look to pull or change any of these levers, it'll be meaningful and I do think some of the supply will be ultimately pushed out of the market. But ultimately it'll be more periods of adjustment that markets will have to rebalance around."
Also, the on asset-backed commercial paper market, Sinniger is hopeful about its prospects. "I'm actually fairly optimistic about the asset backed commercial paper market. In Europe, the head of the ECB has given some very positive feedback on what he thought about securitization and I think regulators are starting to realize it is a very good engine of growth for funding the real economy. Other good news, when you talk to issuers of ABCP, they say that their pipeline is very healthy. There is definitely assets that need to be securitized and on the buy side there are also a lot of investors that are looking for the product. It's actually a great product from a credit standpoint. All the ingredients are there to see ABCP coming back."
Finally, the panel talked about growing or emerging new markets. "We've seen issuance come out of Chile and China, Singapore, a handful of new geographies in the past 4 or 5 years," said Flynn. "We would expect this trend to continue. It's modest by comparison with Europe, the U.S., and Australia, but meaningful nonetheless and the most likely avenue for growth."
