Fresh Perspectives on Asset-Backed Commercial Paper
In the run-up to the 2008 financial crisis, asset-backed commercial paper (ABCP) programs were among the many investments tainted by the subprime mortgage meltdown. The crash precipitated a steady outflow from a total of $1.2 trillion in ABCP investments at their peak in late 2007 to $238 billion in October 2017. But in recent years, the size of the market appears to have stabilized. Many ABCP programs with flawed structures, which we believed were inappropriate for corporate treasury investors before the 2008 crisis, have disappeared, while surviving programs are more often fully backed by stronger sponsors. At the same time, new regulations enhancing market transparency and requiring explicit risk retention by sellers have reassured investors and enhanced credit quality.
Our research report this month, Demystifying Asset-Backed Commercial Paper: A Fresh Perspective on Opportunities and Risks, reprises research we published in 2005 and in 2015 to provide a snapshot of the market along with some practical advice for cash investors in search of yield and portfolio diversification. The report provides a clear summary of the benefits offered by current ABCP investment opportunities, including better risk diversification, reduced idiosyncratic credit risk, and attractive returns. At the same time, we provide an analysis of the structural risks, credit and liquidity risks, and operational risks still associated with ABCP investments.
What’s the bottom line? Our research concludes that ABCP investments may be an appropriate vehicle for large corporate treasury accounts due to their liquidity, flexibility, and yield potential. Different risk concerns among programs require dedicated credit expertise and regular asset collateral monitoring. 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. For more on how and why it may be time to consider ABCP investments, download our report below.