S&P Global Ratings published a release entitled, "Comparing Trends In The U.S. ABCP And ABS Markets: Both Sectors Expected To Grow In 2018." They tell us, "As macroeconomic factors improve and regulatory uncertainty subsides, the U.S. asset-backed commercial paper (ABCP) and asset-backed securities (ABS) sectors should continue to pick up steam this year, according to a report published today by S&P Global Ratings, "Comparing Trends In The U.S. ABCP And ABS Markets: Both Poised For Growth In 2018."
The release explains, "S&P Global Ratings expects ABCP outstanding to grow moderately to between $240 billion-$250 billion in 2018, while the forecast for total ABS issuance is between $225 billion-$250 billion. These expectations follow a trend of steady growth in both sectors since 2015. In December 2017, total commitment and invested amounts for S&P Global Ratings-rated ABCP conduits rose 9% and 2.5%, to $283.7 billion and $207.4 billion, respectively, from $259.7 billion and $202.4 billion in December 2015. By comparison, U.S. ABS issuance rose 25% to $229 billion in December 2017 from $183 billion in December 2015."
S&P continues, "The report published today looks at key trends since 2015 for various asset types funded in the ABCP conduits, including auto loans and leases, credit card receivables, trade receivables, and student loans, among other commercial and consumer assets. According to the report, auto and trade receivables have continued to be the staple assets funded, as large auto issuers typically rely on ABCP conduits as an essential alternative or sole source of funding. Newer assets, including personal loans and mobile handsets, have also increased in recent years. However, student loans, credit cards, and mortgages have been negatively impacted by the macroeconomic factors specific to their industry, thus representing a smaller percentage of assets funded in the conduits in 2017 compared with two years before."
They write, "According to the report, higher consumer lending in recent years has benefited the consumer sector in general, and this momentum is expected to continue in 2018. The positive trends in the ABS sector are expected to benefit the ABCP sector as well. In addition, the Federal Reserve's interest rate hikes accompanied by a normal (or steeper upward-sloping) yield curve will likely make short-term borrowing more attractive compared to costlier long-term loans, which should benefit the short-term ABCP sector. A higher interest-rate environment generally incentivizes issuers to fund assets through the lower-cost funding that ABCP offers."
Finally, S&P adds, "Unlike ABS, ABCP is unique because it offers investors the flexibility of "atypical paper" by offering different maturities, floating-rate notes, and other options via redeemable features, which can create efficiencies for banks to address their liquidity coverage ratio. As current pricing levels for ABCP have reached pre-crisis levels, this sector continues to offer a unique product to investors, as well as an alternative capital market-based funding source for banks. Thus, as the overall securitization market has evolved since the financial crisis, the ABCP sector will remain a viable funding source to fuel economic growth."
In other news, yesterday's Bond Buyer featured the article, "Banks, broker-dealers accused of widespread fraud and collusion over VRDO rate resets." It says, "Eight Wall Street and regional banks and broker-dealers have been accused in a whistleblower suit of 'widespread fraud and collusion' in connection with remarketing the variable rate demand obligations of state and local issuers in Illinois. The suit was filed by `Edelweiss Fund LLC on behalf of Illinois under the Illinois False Claims Act in the Circuit Court of Cook County Ill., against JPMorgan Chase & Co, Citigroup, Inc., Bank of America Corp., Barclays PLC, Morgan Stanley, William Blair & Co., BMO Financial Group, and Fifth Third Bancorp. It claims the firms used a 'Robo Resetting' device to fraudulently impose 'artificially high interest rates' on the VRDOs so they would not have to be remarketed."
The article tells us, "As a result, these firms collected tens of millions of dollars of remarketing fees each year from issuers in Illinois, without really providing remarketing services, the suit claims. The banks also collected fees from issuers for serving as liquidity providers for the VRDOs, when such services were rarely, if ever, needed, the suit claims. The high rates the firms allegedly set ensured the VRDOs would remain as holdings of tax-exempt money market funds, some of which were owned or managed by these firms, according to the suit."
It states, "Several municipal market participants, asked generally about the potential for abuse in setting VRDO rates before the suit was made public, said they would be surprised to see wrongdoing. VRDO rates must be reset at a level necessary to market them at par. Also VRDO rates are transparent. Remarketing agents report rate resets to the Municipal Securities Rulemaking Board's Short-Term Obligation Rate Transparency (SHORT) System and MSRB makes them available on its EMMA website."
The Bond Buyer comments, "In addition, five of the firms charged in this whistleblower suit were among the top 10 nationally ranked remarketing agents in each year during the four-and-a-half-year period that the forensic analysis was conducted, according to Thomson Reuters' data. These firms included JP Morgan, Citi, Bank of America Merrill Lynch, Morgan Stanley, and Barclays. The other top rated RMA was Wells Fargo.... The Securities and Exchange Commission would not comment on whether they are investigating these firms or VRDO remarketing practices."
They explain, "VRDOs are tax-exempt, variable rate bonds that are nominally long-term with 20- or 30-year maturities, but are considered short-term because their interest rates are reset periodically, typically weekly. They contain a 'put' feature that allows investors to tender them back to tender agents or remarketing agents. The RMAs will then market the VRDOs at a par rate that is 100% of the face value of the security as well as accrued interest. According to the MSRB, the interest rates can be determined at reset dates in one of three ways: by the remarketing agent, according to a formula, or at the highest allowable interest rate as specified in the VRDO documents. However, rate reset data published by the MSRB show the vast majority of rates are reset by remarketing agents."
The piece adds, "VRDOs are treated as short-term low risk, high liquidity, tax-free investments and are typically held by tax-exempt money market funds. They meet the Securities and Exchange Commission’s strict regulatory requirements for the types of securities that MMFs can hold. VRDOs are usually secured by letters of credit or standby purchase agreements from highly-rated commercial banks that require the banks to purchase the VRDOs if holders exercise their put rights and the VRDOs cannot be remarketed. The issuers pay fees for the LOCs, which provide credit enhancement and liquidity, and for standby purchase agreements, which just provide liquidity."
Note: Crane Data's latest Money Fund Portfolio Holdings show a total of $76.7 billion in VRDNs (Variable Rate Demand Notes) held by money market funds, or 2.5% of the total $3.059 trillion in assets. (This is from the "Form N-MFP" version of our 3/31/18 holdings data.)
