ABCP boosted by demand, diversification

US ABCP outstanding is expected to grow moderately this year, as prime institutional money-market funds return to the market and new investors enter. At the same time, conduit sponsors are expanding their portfolios with non-traditional assets.

Money-market fund investment in ABCP fell drastically leading up to and following money-market reform in 2016 (SCI 22 August 2016). However, S&P figures suggest that money-market funds increased their holdings in ABCP to over 20% last year, from 5% during the reform period.

Dev Vithani, director at S&P Global Ratings, notes: “Post money-market reform, 2a7 funds are returning to the ABCP market adopting different forms of investment vehicles, including SMAs. In addition, the ABCP investor base has benefited from significant diversification over the past two years, with an influx of non-2a7 funds, private and government funds and corporate investors.”

As of December 2018, traditional assets - such as auto loans and leases, credit cards and trade receivables - accounted for about 79% of the collateral in the partially supported programmes rated by S&P. But a shift in investor preferences and the desire of sponsors to diversify collateral means that the proportion of non-traditional (including servicer advances, contract payment rights, marketplace loans and wireless handset device plans) and commercial (including commercial loans and leases, floorplan, fleet leases, railcars and containers) assets is growing, respectively making up around 7% and 10% of the collateral in partially supported programmes. These segments respectively comprise 29% and 18% of the total CP market, however.

Vithani confirms that many fully supported conduits are increasing their overall funding through non-traditional assets. “Banks are typically willing to wrap the credit risk as one way of deepening the relationship with their clients. At the same time, the liquidity wrap provided by conduits helps investors get comfortable with new assets and new borrowers,” he says.

He continues: “The conduit environment and its associated liquidity is a good way to test market acceptance for non-traditional exposures before potentially terming them out. For instance, many large mobile phone carriers are funding device payment plans via ABCP, yet only Verizon has issued a term securitisation.”

Four new conduits were established in 2018 – two (the Barclays-sponsored Salisbury Receivables and Sheffield Receivables) were resurrected post-crisis and two others (JPMorgan’s collateralised CP programme, FLEXCo, and Barclays’ Sunderland Receivables) were assigned A1 ratings by S&P. The Barclays conduits can all issue standard, callable, puttable and puttable/callable notes.

Vithani notes that a number of other sponsors are considering structural innovations, such as adding the ability to issue non-US dollar CP or including callable and puttable features to increase their programme flexibility. “We’re also seeing more amendment activity and a focus on commitments and improving utilisation rates. The aim is to create more efficient facilities under the existing regulatory regimes.”

S&P expects US ABCP outstanding to grow moderately to between US$255bn-US$260bn this year, from US$253.5bn, as of year-end 2018. Indeed, short-term financing options - including ABCP – are anticipated to become increasingly attractive for US sponsors if rates rise, the yield curve steepens and spreads widen.

Corinne Smith