S&P: Commercial Paper Market ‘Down, But Not Out’

MBA (7/10/2008 ) Sorohan, Mike
Despite an abrupt reversal of course since last year, the U.S. asset-backed commercial paper market continues to serve an important and viable commercial function in the global economy, according to a new report published by Standard & Poor's Ratings Services, New York.
S&P Credit Analyst Scott Sehnert noted that U.S. ABCP outstanding doubled to $1.2 trillion between 2004 and 2007 before abruptly reversing course last September, leading some market observers to conclude that this market had strayed too far from its original purpose to provide commercial banks with an alternative, capital markets-based funding source for their core corporate borrowers.

"We are seeing signs that the market has begun to take steps toward a relaunch—an ABCP 2.0, so to speak, sparked by investor demand for greater clarity from both the ABCP issuers and the rating agencies," Sehnert said

The S&P report, The U.S. Asset-Backed Commercial Paper Market May Be Down, But It's Not Out, said in particular, investors want increased details about the nature of specific conduits' assets and any associated risk factors. In addition, they want more specificity regarding varying structural mechanics relied upon to provide for the timely repayment of outstanding ABCP.

"Armed with this information, investors have become more discerning between ABCP programs, as well as their sponsors," Sehnert said. "They are demanding a greater risk premium from programs where they perceive greater asset credit or liquidity risk, and are staying away from programs where the reporting does not meet the new market expectations for increased transparency."