Asset-backed commercial paper

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Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralized by other financial assets. Institutional investors usually purchase such instruments in order to diversify their assets and generate short-term gains.

ABCP is typically a short-term instrument that matures between 1 and 270 days (average of 30 days) from issuance and is issued by an Asset-backed commercial paper program or Conduit. A conduit is set up by a sponsoring financial institution. The sole purpose of a conduit is to purchase and hold financial assets from a variety of asset sellers. The conduit finances the assets by selling asset-backed commercial paper to outside investors such as money market funds or other “safe asset” investors like retirement funds. The conduit is referred to as a structured investment vehicle.

A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues with significantly less leverage (10-15 times) than traditional banks (25-50 times). They are simple credit spread lenders, frequently "lending" by investing in securitisations but also by investing in corporate bonds and funding by issuing commercial paper and medium term notes, which were usually rated AAA until the onset of the financial crisis. They did not expose themselves to either interest rate or currency risk and typically held asset to maturity. SIV's differ from asset-backed securities and collateralized debt obligations in that they are permanently capitalized and have an active management team. They do not wind-down at the end of their financing term, but roll liabilities in the same way that traditional banks do.[1]

They are generally established as offshore companies and so avoid paying tax and escape the regulation that banks and finance companies are normally subject to. In addition, until changes in regulations around 2008, they could often be kept off the balance-sheet of the banks that set them up, escaping even indirect restraints through regulation. Due to their structure, the assets and liabilities of the SIV was more transparent than traditional banks for investors. SIVs were given the label by Standard & Poors -- Moody's called them "Limited Purpose Investment Companies" or "LiPICs". They are considered to be part of the non-bank financial system, which has two parts, the shadow banking system comprising the "bank sponsored" SIVs (which operated in the shadows of the bank sponsors balance sheets) and the parallel banking system, made up from independent (i.e. non bank aligned) sponsors.

Invented by Citigroup in 1988, SIVs were large investors in securitisations. Some SIVs had significant concentrations in US subprime mortgages, while other SIV had no exposure to these products that are so linked to the financial crisis in 2008.[2] After a slow start (there were only 7 SIVs before 2000) the SIV sector tripled in assets between 2004 and 2007 and at their peak just before the financial crisis in mid 2007, there were about 36 SIVs[1][3] with assets under management in excess of $400 billion.[4] By October 2008, no SIVs remained active.[5]

The strategy of SIVs is the same as traditional credit spread banking. They raise capital and then lever that capital by issuing short-term securities, such as commercial paper and medium term notes and public bonds, at lower rates and then use that money to buy longer term securities at higher margins, earning the net credit spread for their investors. Long term assets could include, among other things, residential mortgage-backed security (RMBS), collateralized bond obligation, auto loans, student loans, credit cards securitizations, and bank and corporate bonds.

List of Structured Investments Vehicles (SIVs)[edit]

Sponsor name SIV conduit
Template:FlagocinABN AMRO Amstel Funding
United StatesAIG Nightingale Finance
SpainAxon Asset Management Axon Financial Funding
CanadaBank of Montreal Links Finance
Parkland Finance
United KingdomBarclays Sheffield Receivables
United StatesCeres Capital Partners Victoria Finance
United KingdomCheyne Capital Cheyne Finance
United StatesCitigroup Beta
Centauri
Dorada
Five Finance
Sedna Finance
Vetra Finance
Zela Finance
GermanyDresdner Kleinwort (Commerzbank) K2
United KingdomEaton Vance Eaton Vance Variable Leveraged Fund
United KingdomEiger Capital Management Orion Finance
BelgiumFortis (BNP Paribas) Scaldis Capital
United KingdomGordian Knot Sigma Finance
Theta Finance
United KingdomHBOS (Lloyds Banking Group) Grampian Funding
United KingdomHSBC Asscher Finance
Cullinan Finance
Solitaire Funding
Germany HSH Nordbank Carrera Capital Finance
AustriaHypo Morrigan TRR
GermanyIKB Rhineland Funding
NetherlandsING Mane Funding
United KingdomLloyds Banking Group Cancara Asset
United StatesMBIA Hudson-Thames Capital
FranceNatixis Cortland Capital
United StatesNSM Capital Management Abacas Investments
NetherlandsRabobank Atlantis One
Tango Finance
FranceSociete Generale Premier Asset Collateralised Entity
United KingdomStandard Chartered Whistlejacket Capital
White Pine
GermanyWestLB Harrier Finance Funding
Kestrel Funding

Structure[edit]

ABCP is typically a short-term instrument that matures between 1 and 270 days (average of 30 days) from issuance and is issued by an Asset-backed commercial paper program or Conduit.[6][7]

A conduit is set up by a sponsoring financial institution. The sole purpose of a conduit is to purchase and hold financial assets from a variety of asset sellers. The conduit finances the assets by selling asset-backed commercial paper to outside investors such as money market funds or other “safe asset” investors like retirement funds.[8]

The financial assets that serve as collateral for ABCP are ordinarily a mix of many different assets, mostly asset-backed securities (ABS), residential mortgages, commercial loans and CDOs. Most of the assets are AAA-rated, some are un-rated assets generated by the sponsor financial institution, the mixture are jointly judged to have a low risk of bankruptcy by a ratings agency. The asset origins are mostly United States (68%), Germany (15%) and United Kingdom (10%).[9] Many large institutions heavily invested in these assets because ABCP represented a very attractive investment opportunity: prior to August 2007 this instrument had never encountered difficulties, it benefited from high ratings from agencies and, finally, institutions had important cash assets to invest following a profitable period.[10] However, in 2007-2008 many of these assets performed poorer than expected, making buyers much less willing to purchase ABCP or rollover.[9]

Financial crisis of 2007–08[edit]

As the mortgage situation in the United States became more serious, market became unwilling to purchase ABCP. This caused trouble for financial institutions that had relied on sales of ABCP to obtain funds for use in longer-term investments (see Maturity mismatch). For example, as one form of the ABCP program, the structured investment vehicles (SIVs) set up by some commercial banks financed their longer-term, higher-yield investing through sales of ABCP.[11] This had been very profitable when ABCP was considered safe (so that ABCP buyers accepted a low interest rate). When some asset prices dropped, investors were less willing to buy or rollover ABCP. This forced SIVs to quickly liquidate their longer-term investments at a substantial loss.[9] The losses together with the panic in liquidity market formed a liquidity shock to the banking sector, which helped the contagion of the crisis.[12]

In Canada, the financial sector reforms undertook in the years preceding the financial crisis helped strengthen the country's banking system. However, and with an estimated value of CAD 33 billion in ABCP, the consequences of the collapse of the ABCP market could have been very damaging if the Caisse de dépôt et placement du Québec (CDPQ) and the Bank of Canada had not stepped in. In the summer of 2007, Henri-Paul Rousseau, then President and CEO of CDPQ had envisioned and negotiated a unique Canadian solution that consisted in converting the ABCP into long-term bonds[13][14] with the major players signing the Accord de Montréal.[15] This agreement has prevented a forced liquidation, which would have resulted in losses of CAD $20 billion.[10] In the fall of 2008, Marc Carney's negotiation skills [16][17] ensured the completion of what would be considered the largest restructuring in Canadian history. In 2008, RBC Dexia positioned the Caisse in the first quartile for returns amongst the large pension funds.[18] Recently, investors that had purchased ABCP could recuperate as much as 95 cents for every dollar initially invested.[10][15][19][20][21] In the end, the impact was minimal for institutions such as la Caisse de dépôt who recorded a negative impact of 0.1% on the return of depositors.[22]

See also[edit]

References[edit]

  1. ^ a b "Structured Investment Vehicle". Askville. Retrieved 25 August 2013. 
  2. ^ "Citi Agrees to Acquire SIV Assets for $17.4 Billion (Update1)". Bloomberg. 19 November 2008. 
  3. ^ The Financial Crisis Inquiry Report (PDF). National Commission on the Causes of the Financial and Economic Crisis in the United States. 2011. p. 252. 
  4. ^ Neate, Rupert (7 July 2009). "$400bn SIV market sold off in two years". The Daily Telegraph (London). 
  5. ^ http://www.ft.com/cms/s/0/19db6e24-8fff-11dd-9890-0000779fd18c.html
  6. ^ Covitz, Daniel, Nellie Liang and Gustavo Suarez (2009). The conduit is referred to as a structured investment vehicle. The evolution of a financial crisis: Panic in the asset-backed commercial paper market. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board.
  7. ^ Board of Governors of Federal Reserve System. http://www.federalreserve.gov/releases/cp/about.htm.
  8. ^ Acharya, Viral, Philipp Schnabl and Gustavo Suarez (2010). Securitization Without Risk Transfer, September 2010, NBER Working Paper No. 15730
  9. ^ a b c Acharya, Viral, Philipp Schnabl(2010). Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09. IMF Economic Review, 58(1), 37-73.
  10. ^ a b c Pierre Fortin : Cinq ans après, le point sur l’annus horribilis de la Caisse de dépôt http://www.lactualite.com/blogues/le-blogue-economie/cinq-ans-apres-le-point-sur-lannus-horribilis-de-la-caisse-de-depot/
  11. ^ The Fundamentals of Asset-Backed Commercial Paper. Structured Finance Special Report. http://www.imf.org/external/np/seminars/eng/2010/mcm/pdf/rutan1.pdf
  12. ^ Kalemli-Ozcan, Sebnem, Elias Papaioannou and Fabrizio Perri(2012). Global banks and crisis transmission. Journal of International Economics.
  13. ^ Restructuration des PCAA - Crawford donne le crédit à Rousseau. http://www.ledevoir.com/economie/actualites-economiques/236501/restructuration-des-pcaa-crawford-donne-le-credit-a-rousseau
  14. ^ Perspectives - L’influent gouverneur. http://www.ledevoir.com/economie/actualites-economiques/365118/l-influent-gouverneur
  15. ^ a b Des papiers commerciaux payants. http://www.ledevoir.com/economie/actualites-economiques/401897/des-papiers-commerciaux-payants
  16. ^ ABCP fiasco’s silver lining. http://business.financialpost.com/2013/02/18/abcp-fiascos-silver-lining/
  17. ^ PCAA: un cauchemar logistique prend fin. http://www.ledevoir.com/economie/actualites-economiques/229155/pcaa-un-cauchemar-logistique-prend-fin
  18. ^ Des cowboys? http://www.ledevoir.com/economie/actualites-economiques/418124/des-cowboys
  19. ^ Papier commercial - Des titres vendus presque à leur pleine valeur. http://www.ledevoir.com/economie/actualites-economiques/394968/des-titres-vendus-presque-a-leur-pleine-valeur
  20. ^ BlackRock Auctions C$1.5 Billion of Restructured Short-Term Debt Bloomberg. http://www.bloomberg.com/news/2014-03-13/blackrock-auctions-c-1-5-billion-of-restructured-short-term-debt.html
  21. ^ Nouveau déblocage pour la Caisse de dépôt. http://www.ledevoir.com/economie/actualites-economiques/414435/papier-commercial-nouveau-deblocage-pour-la-caisse-de-depot
  22. ^ http://www.ledevoir.com/economie/actualites-economiques/404581/la-debacle-de-2008-est-de-l-histoire-ancienne-pour-la-caisse-de-depot

External links[edit]