Capital Advisors Demystifies ABCP
Capital Advisors Group writes "Demystifying Asset-Backed Commercial Paper." It says, "ABCP can still be a good investment choice in large corporate treasury accounts due to the liquidity, flexibility, and yield potential of the asset class. Most traditional multi-seller conduits persevered through the recent financial crisis. Despite low issuance and investor skepticism, the mechanism of ABCP structures improved due to new regulatory measures. Potential investors should carefully review the strength and type of the sponsor, external support, program type, and asset collateral quality prior to investing. The wide range of risks among different programs requires specialized credit knowledge and regular asset collateral monitoring to minimize risk." The piece adds, "Over the last decade, the ABCP market has evolved significantly. Flawed structures disappeared, and surviving programs are fully backed by stronger sponsors or participating liquidity providers. Regulations have enhanced market transparency and require explicit risk retention by sellers, resulting in a more stable market.... [T]he market make-up has tilted substantially toward the more traditional multi-seller structures." CAG concludes, "ABCP can be an appropriate investment vehicle in large corporate treasury accounts due to its liquidity, flexibility, and yield potential. Different risk concerns among programs require dedicated credit expertise and regular asset collateral monitoring. The financial crisis revealed shortcomings of the less creditworthy structures, while the more traditional multi-seller conduits persevered. Despite lower issuance and on-going investor skepticism, the mechanism of ABCP structures improved due to new regulatory measures. While the complexity of various programs may be intimidating, corporate cash investors may benefit from selecting some of the more traditional, conservative, and higher quality ABCP names for their portfolios. Specifically, investors may be well served by investing in traditional, multi-seller, receivables-backed programs associated with banks with strong credit ratings and track records of ABCP expertise."
