ABC's of ABCP. Jim Ahern Managing Director - Securitization Co-Head ABS and ABCP Group

Transcription

1 Jim Ahern Managing Director - Securitization Co-Head ABS and ABCP Group

2 Table of Contents What is ABCP? History of ABCP Types of ABCP Programs ABCP Features/Characteristics The ABCP Market 2

3 What is ABCP?

4 What is ABCP? Commercial paper described: Money market security, usually in the form of a promissory note, issued by corporations or banks Typically used to purchase inventories or to provide working capital Can be Self (Direct)-Issued or Placed through Dealers Issued in Book-Entry Format Typically issued at a discount, although can be interest-bearing Commonly bought by money market funds Exemption from the Securities Act of 1933 Maturity of less than 270 days Not publicly available ($1 million typical denominations) Rule 144a -QIBs Proceeds required to fund current transactions Exemption from the Investment Company Act of 1940 Section 3(c)(7) - Qualified purchaser Traditionally provides companies with a flexible low cost short-term funding alternative to bank debt 4

5 What is ABCP? Asset Backed Commercial Paper described: Commercial paper secured (i.e. backed ) by assets, typically in the form of accounts receivable, loans, leases or securities CP is issued from a special purpose vehicle (often called a Conduit) which is structured to be bankruptcy-remote Typically highly-rated - usually in the top two short term rating categories from Rating Agencies Is repaid at maturity through cash proceeds from asset collections or from issuance of new ABCP (i.e. rolled ) Like non-asset backed commercial paper ABCP is: Unregistered with SEC Typically purchased by money market funds subject to Rule 2a-7 Eligibility Sold book entry on a discounted basis 5

6 Background of ABCP

7 Background of ABCP Born of Capital Adequacy Rules ABCP first appeared in the 1980s as a means for large commercial banks to finance their commercial customers trade receivables in a capital-efficient manner and at competitive rates Basle Accord created strong incentive for Off Balance Sheet funding options. Extended CP Market Access to Lesser or Unrated Companies Afforded access to borrowers unable to issue their own corporate CP or to borrow from banks at practical rates. Expanded Funding Sources for Higher Rated Companies Funding anonymity has also been an attraction Growth Has Paralleled ABS Market Securitization techniques evolved and ABCP became a common source of warehousing for ABS collateral. 600% Market Growth from peaking at $1.2 Trillion in Summer 2007 Diversification of Asset Types & Products 7

8 Background of ABCP Why do (bank) sponsors establish ABCP programs? Balance Sheet Management Reduce regulatory capital requirements or lever existing capital Finance high quality, low margin assets off the bank s balance sheet Control size of balance sheet Regulatory Capital Arbitrage Better align regulatory capital with economic risk-based capital Improves financial ratios Additional source of highly liquid funding Help address loan growth expectations > deposit growth Consistent alternative source of fee-based revenue Increases non-interest income as a percentage of total income Enhances market awareness of bank sponsors Alternative Funding Asset specific funding program separate from sponsors direct liabilities 8

9 Types of ABCP Programs

10 Types of ABCP Programs ABCP Program Structures employed today include the following: Multi-seller Single-seller Securities Arbitrage Vehicles Structured Investment Vehicles Credit Arbitrage Loan-Backed Hybrid Vehicles - incorporating a combination of the above types 10

11 Types of ABCP Programs: Multi-Seller Programs A Multi-Seller ABCP Conduit is a limited purpose, bankruptcy-remote SPV that provides financing for receivables pools generated by multiple, unaffiliated originators/sellers Multi-seller programs are most commonly established and sponsored by large commercial banks and typically provide financing to that bank s corporate clients These banks typically serve as Program Administrator or Administrative Agent for the Conduit, and commonly provide liquidity and credit support as well Multi-seller Conduits are typically structured to: Make loans against or purchase interests in receivables pools Warehouse assets prior to a term ABS take-out, and/or Purchase securities ABCP issued from a large multi-seller vehicle is typically perceived as low risk for investors due to Originator diversification Asset diversification and Deal-Specific Credit Enhancement Program-Wide Credit Enhancement and 100% Liquidity Support Sponsorship 11

12 Types of ABCP Programs: Multi-Seller Schematic Receivables Generated Obligors Obligors Obligors Obligors Obligors Seller 1 Seller 2 Seller 3 Seller 4 Seller n Seller collections advances against new receivables Receivables Receivables SPV Transferor True Sale ABCP Conduit First Priority Perfected Security Interest Credit Enhancement Providers Administrator fees credit support payments fees payments on maturing ABCP ABCP Conduit purchase price of new ABCP Issuing & Paying Agent liquidity advances fees dividends Liquidity Providers Conduit Owner payments on maturing ABCP purchase price of new ABCP First Loss / Equity holder ABCP Investors (generally money market funds) 12

13 Types of ABCP Programs: Other Types of ABCP Programs Single-seller ABCP conduit - a limited-purpose, bankruptcy-remote entity that issues CP as a way to finance the receivables of a single originator. Since there is one seller, seller-insolvency is greater than in a multi-seller vehicle. Single-seller programs are popular among large credit-card issuers, major auto manufacturers and some mortgage originators. Motivations for their use include the following: Cost benefits over participating in another sponsor s multi-seller program Allows sponsor more control over operations Favorable accounting or tax treatment Securities Arbitrage Vehicles these vehicles are setup to efficiently fund the purchase of various types of securities; the two basic types are Structured Investment Vehicles and Credit Arbitrage Vehicles. Structured Investment Vehicle ( SIV ): SIVs are market value programs that purchase highly-rated securities (ABS, corporate debt) and seek to benefit from spread differentials between longer maturity assets and short term funding. An SIV would typically fund itself by issuing both CP and MTNs as well as equity-like capital notes. SIV-Lites - these structures are hybrids between CDO s and traditional SIVs. In their quest to gain additional yield particularly in a tightened spread environment, they are more levered than a typical SIV and often invest in subprime mortgages due to their higher spread. This combination of higher leverage and exposure to more risky collateral put SIV-Lites at greater risk when the market started to experience liquidity problems in mid-2007 Credit Arbitrage Vehicles expose investors to credit risk, like a cash flow CDO but not market risk (as an SIV). They are more passive than a typical SIV and their risk profile tends to follow that of their sponsor s securities portfolio. Loan-Backed similar to a CLO, these are designed to fund a portfolio of bank loans, often to unrated companies CDOs: ABCP has also been issued out of CDOs, typically being the most senior class in the capital structure. CDO-issued ABCP usually benefits from 100% liquidity support Hybrids: ABCP programs encompassing some characteristics of more than one of the above types of programs 13

14 ABCP Conduit Characteristics

15 ABCP Conduit Characteristics Full Support vs. Partial Support ABCP programs can be Fully supported or Partially supported depending on the level of external credit enhancement provided to the program: Fully Supported: Fully supported programs use an external support facility to provide 100% coverage against credit risk and liquidity risk to support the transactions within the conduit. Due to the external support, rating agencies focus on the strength of the support provider(s), which are usually highly rated banks. Forms could be a guarantee, LOC, surety bond, TRS or liquidity facility addressing credit risk Partially-Supported: These programs make use of two support facilities; a credit enhancement facility aimed at reducing credit risk (and to some extent liquidity risk) and another facility focusing on liquidity. The facilities do not cover 100% of credit risk, so rating agencies focus on receivables performance in assigning ratings; i.e. investors bear a portion of the credit risk of the receivables. Partially funded facilities evolved in part due to capital requirements imposed on support providers by bank regulators Post Review vs. Pre-Review Post-Review these agreements allow for the conduit to enter into new transactions that are aligned with the conduits existing written credit and investment policy without first getting rating confirmation; The rating agencies then review the transactions at a later date as part of their customary periodic review process. Most Single-Seller Programs and fully supported ABCP conduits are Post Review Pre-Review New transactions must be submitted to the rating agencies prior to funding for their confirmation of conduits short term ratings. Most multi-seller programs are Pre-Review 15

16 ABCP Conduit Characteristics Credit Enhancement Transaction Level used to cover losses on a specific transaction This is the first level of protection against deterioration of the collateral Available only to a specific transaction, not to cover losses on other transactions Forms: Overcollateralization, subordination, excess spread, reserve account, guarantee, or liquidity facility providing credit protection or partial seller recourse Program-wide used to cover losses across most receivables in the conduit Second layer of protection against losses after transaction level protection Available to all transactions in a conduit Forms: LOC, Surety Bond, third party guarantee, asset purchase agreement or loan facility Program wide enhancement increases with the number of transactions in a conduit Liquidity Facilities Required to ensure that sources of funds are available to repay maturing CP on a timely basis. Often structured as 364-day renewable facilities (364-day maturity driven by regulatory capital guidelines) Typically sized at 102% of the transaction limit; the extra 2% for partially hedging interest rate risk. Provided by highly rated financial institutions May be transaction-specific or program-wide Liquidity Loan Agreement ( LLA ) commitment to lend to a conduit when requested Liquidity Asset Purchase Agreement ( LAPA ) commitment to purchase an asset when requested 16

17 ABCP Conduit Characteristics Conduit Ratings The majority of ABCP programs carry the highest short term ratings (P-1, A-1/A-1+, F1/F1+, R-1) (1), which is the rough equivalent to long-term rating categories in the Aaa to A2 range / AAA to A range. Service Providers Aside from credit and liquidity support, Conduits typically have numerous Service Providers, including some or all of the following: Administrator and/or Manager Issuing & Paying Agent Placement Agent Collateral Agent Custodian Hedge Counterparty Credit and Investment Policy Conduits are governed by investment restrictions set forth informally or formally in a Credit and Investment Policy. Collateral eligibility requirements, portfolio composition and concentration limits are often strictly defined Issuance Tests Must be satisfied before ABCP can be issued Non-bankruptcy, positive tangible net worth, sufficient liquidity, asset quality Authorized Amount vs. Outstanding Amount Outstanding Amount < Authorized Amount (1) Moody s, S&P, Fitch, DBRS respectively. DBRS further delineates short term ratings into high, middle and low. 17

18 ABCP Liabilities Different Forms of ABCP Extendible CP: ABCP programs are structured similar to normal ABCP programs, but the sponsor has the option to extend the notes to a legal final maturity out to 397 days if new CP cannot be issued to repay maturing CP on the expected maturity date. Upon extension, investors receive higher spread until the CP is paid down, typically L+25. Extendible programs are market value programs, that is they typically do not have external liquidity support and rely on the inherent liquidity of the assets through whole loan sales or securitizations to pay off extendible notes Extendible programs have been used for various types of assets including credit cards, trade receivables, mortgages, floorplan and student loans Market value swaps are often used in extendible programs to hedge price risk, interest rate risk or for reasons of liquidity/credit enhancement Some extendible ABCP programs are referred to as Secured Liquidity Notes Medium Term Notes ( MTN ): MTNs are not commercial paper but are used by some ABCP vehicles as an incremental funding source MTNs have maturities ranging from 180 days up to 30yrs and bear long term ratings, often triple-a and generally issued on a floating rate, interest bearing basis MTNs can be issued to reduce the need for additional backup liquidity as well as diversify funding sources and locking in longer term funding to complement short term ABCP Opportunistic issuance is also a key advantage of MTNs as the ability to come to market quickly when favorable conditions prevail could mean the difference between operating in the red and a profitable trade 18

19 The ABCP Market

20 $ billions $1,200.0 The ABCP Market Historical Volume ABCP Outstanding Volume vs. Unsecured CP 30% $1, % 20% $ % 10% $ % $ % -5% $ % -15% $- -20% Mar-92 Dec-92 Sep-93 Jun-94 Mar-95 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 YOY % change of ABCP (right axis) Unsecured CP Asset Backed Commercial Paper Outstanding Source: Federal Reserve 20

21 $ billions $2,000 $1,800 The ABCP Market Historical Volume Global ABCP Outstanding Volume (end of year amounts) US EMEA Canada Australia and NZ Japan $28.5 $46.0 $92.8 $1,600 $1,400 $1,200 $1,000 $6.4 $16.9 $38.7 $14.2 $19.3 $40.2 $21.1 $26.0 $48.3 $24.6 $33.3 $54.3 $21.3 $33.9 $72.1 $329.4 $488.4 $33.2 $57.1 $79.1 $407.4 $800 $600 $400 $200 $4.3 $15.6 $25.8 $256.1 $9.5 $26.9 $45.3 $381.8 $11.0 $36.4 $61.7 $520.8 $11.0 $40.1 $86.7 $645.8 $135.4 $175.6 $221.4 $276.8 $765.8 $752.8 $717.3 $744.4 $926.4 $1,076.5 $816.3 $0 Totals: $301.9 $463.5 $629.9 $783.6 $963.3 $1,002.2 $1,034.1 $1,133.4 $1,383.0 $1,732.2 $1,393.2 Source: Moody s, S&P, Federal Reserve. - Global includes the US, EMEA, Australia, New Zealand, Canada, Japan. EMEA data as of 10/30/07 - Non-USD issuance converted to USD using year-end F/X rate 21

22 ABCP Market Trends 1980s and early 1990s: ABCP outstanding volume enjoyed strong growth since the markets inception in the 1980s fueled by tremendous growth in consumer assets such as credit cards and autos plus regulatory capital pressures on bank balance sheets ABCP evolved from its roots financing trade receivables into an important tool for the financing of several other asset types Loan-backed programs emerged in the early 1990s Mid 1990s: Credit arbitrage programs were introduced into the marketplace Late 1990s: Hybrid programs, Single-Seller programs and Extendible note programs were introduced Early 2000s: SIV s were introduced (and experienced rapid growth up until mid 2007) The reduced volume of ABCP in impacted the corporate CP market more dramatically-especially in the nonfinancial sector and was due to several factors: Given the then-slowed economy, funding needs were generally down A flat yield curve and persistent low rate environment made longer term financing more attractive Increased credit concerns during a period of economic stress evidenced by many corporate downgrades Uncertainty over pending Regulatory/Accounting changes: An event which threatened to radically alter the state of the ABCP market was the introduction of FASB's FIN46/FIN46R in 2003 which required ABCP sponsors to either consolidate conduit assets on-balance sheet or restructure their programs to transfer the first loss position a third party. 22

23 ABCP Market Trends 2007: Outstanding U.S. ABCP volume reached a record high in July 2007, hitting nearly $1.2 trillion. Since that point, U.S. ABCP outstandings have fallen 30% by year end Volume Growth was fueled by Market Value Programs - which rely on the liquidity and viability of Term ABS markets for refinancing and for asset valuation, specifically: Extendible ABCP programs (particularly Mortgage Backed), and SIV s As the crash in the subprime mortgage market came during the summer of 2007, Market Value Programs were hit hard by shattered investor confidence and the lack of available liquidity Some Extendible Note Programs were unable to roll paper and were subsequently forced to extend ABCP with existing noteholders. Many of these programs have shut down. SIV s were impacted on both the asset side (declining values due to marks on collateral) and the liability side (lack of liquidity drove higher funding costs). As asset values have declined and liquidity has dried up, may SIV s have ended up on the balance sheets of bank sponsors. 23

24 The ABCP Market Today Liquidity Crunch remains but is Subsiding: The liquidity crisis that hit in mid-summer 2007 placed ABCP conduits under some of the most intense funding pressures they have ever experienced through year end Early 2008 prospects appear to be improving as investors slowly return and funding costs subside. Flight to Quality: Due to the recent liquidity challenges and current market conditions, for the immediate future the programs that will be favored will be those bank-sponsored, multi-seller programs covered by traditional liquidity facilities backed by well-diversified portfolios managed by strong, experienced Sponsors Market Tiering: Similar to what has occurred in the term ABS market, recent market volatility has also resulted in tiering among ABCP issuers with the strongest, most experienced sponsors getting the best pricing Death of Many Market Value Programs: Market value programs are not likely to recover soon if at all, as the market value model on which these programs have relied no longer appears viable Spread Widening prevails but is Improving: Following other credit products, commercial paper spreads widened significantly in the latter half of After stabilizing somewhat from the end of September to the end of November, spreads widened again for the remainder of the year. Spreads averaged 1ML - 3bps from January 2007 until August 8, 2007; from August 9 through year-end, spreads averaged 1ML + 36bps (1). Early 2008 spreads appear to be subsiding but still remain above LIBOR. (1) Federal Reserve, Bloomberg 24

25 12/3/07 12/17/07 12/31/ The ABCP Market Today 2007: A Tale of Two Halves 2007 Funding Levels 1m LIBOR Federal Funds ABCP 30 day yield (A1+/P1) Source: Bloomberg, Federal Reserve 25 11/19/07 1/15/07 1/29/07 2/12/07 2/26/07 3/12/07 3/26/07 4/9/07 4/23/07 5/7/07 5/21/07 6/4/07 6/18/07 7/2/07 7/16/07 7/30/07 8/13/07 8/27/07 9/10/07 9/24/07 10/8/07 10/22/07 11/5/07 1/1/07 Rate (%)

26 The ABCP Market by Program Type Program Type ABCP Market by Program Type Moodys's Rated Programs as of September 30, 2007 ABCP Outstanding ($ Mil.) % by Outstanding Number % by Number Repo/TRS 4.2% SIV 7.2% SIV-LITE 0.4% Loan-Backed 0.3% Other 0.8% Multi-Seller 655, % % Sec. Arbitrage 173, % % Single-Seller 173, % % Hybrid 153, % % SIV 95, % % Repo/TRS 56, % % SIV-LITE 5, % 8 2.1% Loan-Backed 3, % 1 0.3% Other 11, % 4 1.1% Total $1,327, % % Hybrid 11.5% Single-Seller 13.1% Sec. Arbitrage 13.1% Multi-Seller 49.4% Program Type ABCP Market by Program Type Moodys's Rated Programs as of September 30, 2000 ABCP Outstanding ($ Mil.) % by Outstanding Number % by Number Single-Seller 8.8% Loan-Backed 4.9% Hybrid 2.0% Other 1.7% Multi-Seller 348, % % Sec. Arbitrage 106, % % Single-Seller 48, % % Loan-Backed 26, % % Hybrid 10, % 8 2.7% Other 9, % 1 0.3% Total $550, % % Sec. Arbitrage 19.3% Multi-Seller 63.4% 26

27 The ABCP Market The Sponsors 20 Largest Multiseller ABCP Programs As of September 30, 2007 Program Name Administrator CP O/S ($M) Lexington Parker Capital Company Liberty Hampshire Company 20,750 Sheffield Receivables Corporation Barclays Bank PLC 19,458 Ranger Funding Company LLC Bank of America, N.A. 15,839 Thames Asset Global Securitization No.1 Royal Bank of Scotland PLC 15,256 CAFCO, LLC Citibank, N.A. 15,052 Variable Funding Capital Corporation Wachovia Bank, N.A. 14,795 Falcon Asset Securitization LLC JPMorgan Chase Bank 14,778 Park Avenue Receivables Company LLC JPMorgan Chase Bank 14,738 CRC Funding LLC Citibank, N.A. 14,359 Barton Capital LLC Société Générale 14,305 Concord Minutemen Capital Company Liberty Hampshire Company 14,157 Jupiter Securitization Company LLC JPMorgan Chase Bank 13,655 CHARTA, LLC Citibank, N.A. 13,470 Crown Point Capital Company LLC Liberty Hampshire Company 13,464 Fenway Funding LLC Hudson Castle Group Inc. 12,781 Gemini Securitization Corp LLC Deutsche Bank AG 12,778 Yorktown Capital LLC Bank of America, N.A. 12,622 Chariot Funding LLC JPMorgan Chase Bank 12,260 Galleon Capital LLC State Street Global Markets 11,928 Amsterdam Funding Corporation ABN AMRO Bank N.V. 11,482 Top 20 Total $287,927 Total Multiseller Outstandings $655, Largest ABCP Program Administrators As of September 30, 2007 Market Share Administrator $ Millions # Issuers (%) Citibank, N.A. 104, % ABN AMRO Bank N.V. 74, % JPMorgan Chase Bank 62, % Bank of America, N.A. 60, % QSR Management Limited 51, % HSBC Bank PLC 46, % HBOS Treasury Services plc 38, % Deutsche Bank AG 38, % Rabobank Nederland 36, % Société Générale 36, % ING Bank N.V. 32, % Barclays Bank PLC 29, % Bank of Tokyo-Mitsubishi UFJ 28, % State Street Global Markets 28, % WestLB AG 27, % Fortis Bank S.A./N.V. 27, % Dresdner Bank AG 26, % Lloyds TSB Bank PLC 25, % Calyon 25, % Hudson Castle Group Inc. 23, % Top 20 Total 825, % Total 1,327, % Moody s ABCP Program Index 27

28 The ABCP Market Asset Type and Originator Rating Asset Types in Multiseller and Hybrid ABCP Programs by CP Outstanding Amount ($670 Billion CP Outstanding As Of 08/31/07) Originator Ratings in Multiseller and Hybrid ABCP Programs by CP Outstanding Amount ($670 Billion CP Outstanding As Of 08/31/07) Equipment Leases 2% Commercial Mtge Loans 2% Consumer Loans 3% CBO & CLO 4% Auto Leases 4% Residential Mortgages 5% Student Loans 7% Floorplan 2% Other 8% Other Mortgages 2% (a) Commercial Loans 10% Equipment Loans 1% Gov't Guaranteed Loans 1% Securities 11% Insurance Premiums 1% Trade Receivables 14% Credit Cards 12% Auto Loans 11% Not Rated 42% Caa2 <1% Caa1 <1% B3 <1% Ba3 B2 1% Ba2 1% 1% Ba1 3% Baa3 4% A1 3% Aaa 11% Baa2 4% B1 4% Aa2 5% Aa3 4% Baa1 5% A2 4% A3 4% Aa1 4% Other represents an aggregate of categories that individually represent less than 1%. Moody s 28