On a conference call on Tuesday, investors and financiers will attempt to thrash out what is behind the paralysis in the asset-backed commercial paper market, and what is needed to restore confidence among investors, reports the FT’s Gillian Tett.
In the first instance of collective industry action since investors globally went cold on buying the type of commercial paper issued by bank conduits and structure investment vehicles, those on the call will be asked to consider what changes in the sector might succeed in bringing back the buyers who have effectively gone on strike in recent weeks. As the size of the ABCP market has burgeoned to $1,200bn, and the paper typically having a duration of just three months, to motivate them is the prospect of a giant wave of short-term paper maturing and needing to be rolled over, or refinanced, before November.
For those trying to catch up, here’s the FT’s primer on the intricacies of the commercial paper world:
Commercial paper is privately sold, short-term debt that has a maturity of no more than nine months and generally less than 45 days. It was traditionally issued by blue-chip corporates or financial institutions to cover their immediate cash needs. ABCP is similar paper issued by vehicles that invest in other kinds of debt, but with the crucial difference that it is secured against the assets the vehicles hold. ABCP has accounted for most of the growth in commercial paper markets in recent years.
The vehicles that issue ABCP are mainly conduits and structured investment vehicles (SIVs). Both types of vehicle use low-cost ABCP to fund investment in longer-term, higher-yielding assets or lending. Conduits hold roughly $1,400bn of assets worldwide, while SIVs hold about $400bn and their near cousins SIV-lites hold about $12bn. Not all of this is financed by short-term ABCP; some is financed by medium-term notes (MTN) and some by other, longer-term debt.
The market was growing strongly until the beginning of August, with total ABCP outstanding rising towards almost $1,200bn, according to industry estimates. In the past four weeks, the market has shrunk $216bn to $967bn, according to the Federal Reserve, as many investors, particularly so-called money-market funds, have simply stopped buying.
Why does this matter?
For some of these vehicles — and particularly for SIVs and SIV-lites — this can cause huge problems and mean they have to begin selling assets to repay their short-term debt, unless they can find other sources of funding as some conduits and SIV-lites have done.
Is the situation worsening?
Anecdotal evidence suggests investors are increasingly buying ABCP with shorter maturities. Analysts say between 70 and 90 per cent of the US ABCP market is funding only on an overnight basis, but that in Europe, it is too soon to tell by how much maturities are shrinking. However, the pressure is rising now, as there is a spike in the funding calendar each month, around the 17th, when a large amount of paper expires. Since commercial paper settles two days after it is issued, this means funding for September 17th (next Monday) will probably be concentrated this Thursday. Dealogic estimates that in Europe just over $50bn of ABCP matures over the next week, while $109bn-worth of paper matures during September. In the sterling market, about £14.7bn of ABCP is due to expire in September, while in the dollar market about $21.4bn of ABCP is due to expire this month.
Paul J Davies, Chris Flood and Stacy-Marie Ishmael