Total US asset-backed commercial paper (ABCP) outstandings were at $455bn as of November 4, a 35% decline from the beginning of 2009, according to market commentary by Fitch Ratings
The fall in ABCP outstandings comes at a time when the industry is anticipating financial accountancy changes in January and the effect of global risk management regulations that will change the way financial markets operate. In their weekly outlook report, ABCP traders at Credit Suisse
report that "investors have plenty of cash to invest, but with customer pay downs and few new deals getting done, issuers have been unable to satisfy investor demand."
"We expect to continue to see the same strong interest throughout the week.," they said (in reference to this week's trading).
Fitch's credit outlook for ABCP for the rest of 2009 remains negative, along with the outlook for US financial institutions ahead of significant accountancy changes to take place at the beginning of the year with the implementation of Financial Accounting Standards (FAS) 166 and 167. These accounting rules will bring conduit portfolios onto institutions' balance sheets, straining cash reserves
at a time when credit remains frozen.
The November report on the ABCP market (available to download here
) covers Basel II guidelines, a set of risk management regulations that are globally gaining steam -- and criticism
-- and that Fitch indicates will have significant bearing on the ABCP market.
Fitch concluded from a recent study of Basel II guidelines that new rules largely eliminate regulatory capital advantages for conduit sponsors of setting up off-balance-sheet ABCP platforms, according to the report.
"Both multi-seller and securities-arbitrage conduit sponsors are likely to face higher capital charges under the new Basel II guidelines, particularly for any program-wide credit enhancement (PWCE) facilities they provide," the report reads. "The new Basel II guidelines are likely to have a much larger impact on securities arbitrage conduits because of the greater likelihood that both the liquidity and PWCE facilities are considered re-securitization exposures (which face higher capital charges than normal securitization exposures)."
Fitch said it expects the winding-down of some ABCP conduits under the new Basel II guidelines, while other conduits attempt to restructure to achieve compliance and survive under the guidelines.
The ratings agency also indicated enhancements to the Basel II guidelines will not likely have ratings impacts on Fitch-rated conduits.
Fitch also indicated in the ABCP market commentary a positive outlook on global recovery despite recent projections by French investment bank Société Générale
that 2010 might end in “global economic collapse"
under a worst-case bearish economic scenario. Signs of green shoots in financial markets are gaining steam, Fitch said, although determining a timeline for the bottoming of company defaults is difficult to project.
"Historically, data indicates that defaults will peak some two quarters after economic contraction formally ends," the Fitch report said. "The question of timing of defaults in the current recession is complex, due to the prolonged trough, with some elements arguing for an earlier peak and others for a later peak."
Write to Diana Golobay