To roll – with the punches – or not? This is the big question hanging over a corner of the vast asset-backed commercial paper (ABCP) market, worth roughly $1,000bn, says Lex on Thursday. This market, which provides short-term funding for an array of issuers, including mortgage companies, has shown unmistakable signs of stress recently, with spreads widening dramatically in August. But the “real crunch” will come if buyers decide not to roll over their exposure, it adds.
Increasingly, ABCP issued by mortgage originators, using mortgage assets as collateral, is extendable – meaning the maturity can be pushed back several months if the market freezes up, Lex notes. So far there have been a few instances of extensions, “which itself is not a great sign”. Issuers have a few other lifelines. The most important one is the access to back-up lines of credit, on an unsecured basis, offered by the banks.
But these come with a couple of caveats, warnings Lex: “Some might have clauses in them that mean they cannot be automatically drawn down, even when markets are in turmoil. Most importantly, use of such a facility is a sign of such duress it is unlikey to be repeated.”
There was, admittedly, some modest good news on Wednesday as S&P reaffirmed its ratings on several ABCP facilities, two of which are Countrywide’s. But, in current markets, that may not mean that much. (In fact, it meant nothing to Countrywide, the biggest US mortgage lender, as its shares fell a further 13 per cent to $21.29 on the New York Stock Exchange on Wednesday).
At some point, says Lex, “investors cannot be wowed by extra yield or the hope that credit losses in senior tranches are unlikely. They want out. And if buyers decide not to roll over ABCP programmes, or buy new ones that cash out expiring ones, then the banks risk being left with far too much exposure to mortgage collateral, which in turn, constrains their risk appetite further.”
This would be bad enough, concludes Lex, “without considering the even worse scenario of serious impairment to senior rated collateral”.