Standard & Poor's, which began hosting its Annual ABCP Conference yesterday (it continues today), just released a compilation of recently published ABCP research, including a new overview "Asset-Backed Commercial Paper Market May Be Down, But It's Not Out." This flurry of recent publications is meant, "To enhance transparency and provide insight to ABCP market participants." They include: "Standard & Poor's Global Approach To ABCP Conduit Administration," "How Standard & Poor's Analyzes Interest Rate Risk For Asset-Backed Commercial Paper," and "Analyzing Payment Waterfalls In ABCP Conduits."
S&P summarized, "U.S. asset-backed commercial paper (ABCP) outstandings nearly doubled to $1.2 trillion between 2004 and 2007 before abruptly reversing course last September, leading some market observers to conclude that this market had strayed too far from its original purpose -- that is, to provide commercial banks with an alternative, capital markets-based funding source for their core corporate borrowers. Notwithstanding the recent downturn, Standard & Poor's Ratings Services believes that ABCP remains a bedrock business that serves an important and viable commercial function in the global economy. In our view, the original model that existed long before the recent market dislocation, and the factors that made it successful, remains as healthy as ever. In fact, we are seeing signs that the market has begun to take steps toward a relaunch -- an ABCP 2.0, so to speak."
The "Down But Not Out" piece summarizes the troubles in the marketplace last August -- Broadhollow Funding, Ottimo Funding, Luminent Star Funding, KKR Atlantic and KKR Pacific Funding Trust.
It says, "The events related to market value ABCP issuers led many investors to turn away from the entire ABCP market through the end of 2007. Many money market funds, the largest segment of the ABCP investor base, adopted policies restricting any new investment in any ABCP regardless of market value risk, in part to assuage their large institutional investor clientele who appeared to be concerned with minimizing potential headline risk. Following the laws of supply and demand, this retrenchment caused a severe increase in ABCP interest rates -- the few remaining investors were able to demand dramatically higher rates. Some money market funds returned to the market in early 2008, but in many cases only after adopting policies limiting ABCP investments to the large bank-sponsored and fully supported programs.... In addition, investors generally tightened their diversification guidelines by reducing exposure to any single program and also established conservative guidelines for the maturity of these investments."
