Demystifying Asset-Backed Commercial Paper
A Fresh Perspective on Opportunities and Risks
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.
Created in the mid-1980s, asset-backed commercial paper (ABCP) trailed its term asset-backed securities (ABS) cousin in acceptance by fixed income investors, especially corporate cash managers. The stigma against ABCP started to fade in the new millennium, when event risk of corporate names caused the unsecured commercial paper market to shrink dramatically.
Meanwhile, increasing demand from institutional investors for this asset class resulted in the proliferation of innovative ABCP structures that made it more difficult for buyers to discern risk among various programs. Despite that, the market grew rapidly to reach its peak in July 2007, when ABCP outstanding stood at $1.2tn.
Liquidity concerns following the onset of the subprime mortgage crisis pummeled the ABCP market, complemented by the fact that ABCP and the more exotic, now infamous, structured investment vehicles (SIVs) shared some structural similarities. After the Lehman Brothers bankruptcy in September 2008, outflows from prime money market funds, the predominant buyers of ABCP paper, intensified and directly resulted in the reduction of programs outstanding by ABCP sponsors.
As of August 5, 2015, total ABCP outstanding stood at $224 billion, a reduction of 82% from its 2007 peak. By comparison, overall CP outstanding was reduced by 52% to $1.07 trillion over the same period. Two main factors contributed to the reduction in ABCP outstanding, the deleveraging of banks’ off-balance sheet activities and regulatory pressure.