Where does ABCP come from?
November 12, 2008 4:49 AM Subscribe
Who uses asset-backed commercial paper to borrow?
I would like to know whether non-financial companies account for a significant part of asset-backed commercial issues in the US. I understand that a bank or other financial institution will always be involved in the process of creating ABCP, but how often does a non-financial company use ABCP to get funds? The Fed Board website has not been overly helpful, they break down commercial paper into "financial", "non-financial", and "asset-backed".
I would like to know whether non-financial companies account for a significant part of asset-backed commercial issues in the US. I understand that a bank or other financial institution will always be involved in the process of creating ABCP, but how often does a non-financial company use ABCP to get funds? The Fed Board website has not been overly helpful, they break down commercial paper into "financial", "non-financial", and "asset-backed".
how often does a non-financial company use ABCP to get funds?.
All the time.
posted by aheckler at 5:12 AM on November 12, 2008
All the time.
posted by aheckler at 5:12 AM on November 12, 2008
Response by poster: I should have put this in the original post: Bonus points for links to data, especially time series showing the financial/non-financial breakdown over the past few months.
posted by thrako at 5:39 AM on November 12, 2008
posted by thrako at 5:39 AM on November 12, 2008
The "Outstandings" graph may be way you're looking for here.
posted by aheckler at 5:47 AM on November 12, 2008
posted by aheckler at 5:47 AM on November 12, 2008
Response by poster: The "Outstandings" graph may be way you're looking for here.
Thanks, but I have seen that before. I would like a graph/data that showed non-financial asset-backed and financial asset-backed separately, instead of aggregating them into a single quantity.
posted by thrako at 6:16 AM on November 12, 2008
Thanks, but I have seen that before. I would like a graph/data that showed non-financial asset-backed and financial asset-backed separately, instead of aggregating them into a single quantity.
posted by thrako at 6:16 AM on November 12, 2008
Best answer: The SIVs you've likely heard about accessed the ABCP market. Conduit/warehouse facilities involved in the origination/accumulation of financial assets also issue ABCP.
For example, many mortgage and specialty finance (auto, small/med business lenders, equipment leasing, credit card) companies set up "conduit" or "warehouse" facilities which finance the initial funding of new loans. These warehouse facilities get their funding via the ABCP market--since the facility itself isn't an ongoing concern, the CP buyers rely on the collateral to provide credit-worthiness (hence the "asset-backed"). Since ABCP is general short-term paper, the idea is that the warehouse facility provides temporary financing--just enough time until loans can be accumulated and then packaged into a term securitization and sold off as bonds (hence the "warehouse" or "conduit" moniker). The sale of those bonds provided the funds to repay the ABCP.
That's the idea anyway. As the market for this stuff became more aggressive, SIVs were formed and funded that had no intention of pushing off assets into securitizations. Those SIVs often bought high-grade tranches ABS/CDOs.
Since the ABS/CDO market has basically shut down, ABCP issuance has also declined sharply.
posted by mullacc at 8:09 AM on November 12, 2008
For example, many mortgage and specialty finance (auto, small/med business lenders, equipment leasing, credit card) companies set up "conduit" or "warehouse" facilities which finance the initial funding of new loans. These warehouse facilities get their funding via the ABCP market--since the facility itself isn't an ongoing concern, the CP buyers rely on the collateral to provide credit-worthiness (hence the "asset-backed"). Since ABCP is general short-term paper, the idea is that the warehouse facility provides temporary financing--just enough time until loans can be accumulated and then packaged into a term securitization and sold off as bonds (hence the "warehouse" or "conduit" moniker). The sale of those bonds provided the funds to repay the ABCP.
That's the idea anyway. As the market for this stuff became more aggressive, SIVs were formed and funded that had no intention of pushing off assets into securitizations. Those SIVs often bought high-grade tranches ABS/CDOs.
Since the ABS/CDO market has basically shut down, ABCP issuance has also declined sharply.
posted by mullacc at 8:09 AM on November 12, 2008
Response by poster: The SIVs you've likely heard about accessed the ABCP market. Conduit/warehouse facilities involved in the origination/accumulation of financial assets also issue ABCP.
So if I understand correctly, the only companies that used ABCP are those dealing heavily in financial assets, and it is always financial assets that back the paper? I think my confusion was in thinking that the "asset" part could potentially be any old asset (a factory, inventory, etc.) that had some value as collateral. But sounds like you're saying that ABCP must have a financial asset underlying it, more or less precluding it's use by non-financial companies.
posted by thrako at 9:48 AM on November 12, 2008
So if I understand correctly, the only companies that used ABCP are those dealing heavily in financial assets, and it is always financial assets that back the paper? I think my confusion was in thinking that the "asset" part could potentially be any old asset (a factory, inventory, etc.) that had some value as collateral. But sounds like you're saying that ABCP must have a financial asset underlying it, more or less precluding it's use by non-financial companies.
posted by thrako at 9:48 AM on November 12, 2008
Best answer: I'm looking at a list of the top ABCP issuers and the assets are almost all ABS/CDOs, trade receivables, auto loans, credit card receivables and mortgages.
These structures only work when the asset has a set of cash flows associated with it. Accounts receivable work because it's indistinguishable from a short-term loan. Mortgages, credit cards, auto loans are all cash streams. A factory can be valuable collateral, but not a very useful one in an ABCP structure that is set up to securitize cash flows.
And the issuer of the ABCP is not going to be the originating company itself. For example, Ford uses a special-purpose vehicle to finance its auto receivables through the ABCP market. But the entity that issues the ABCP is called FCAR Owner Trust, and it's a bankruptcy remote entity. If you buy ABCP from FCAR Owner Trust, you have no claim on the assets of Ford Motor Company (or Ford Motor Credit Company)--on the other hand, if Ford goes down in flames, it won't directly effect holders of the FCAR ABCP because the trust owns the auto loans and cash flow goes from the borrower to the trust to the ABCP holders.
The ABCP market was originally developed to allow large, high-quality companies finance their trade receivables. It worked so well that the structure was used and modified to handle other financial assets.
posted by mullacc at 10:17 AM on November 12, 2008
These structures only work when the asset has a set of cash flows associated with it. Accounts receivable work because it's indistinguishable from a short-term loan. Mortgages, credit cards, auto loans are all cash streams. A factory can be valuable collateral, but not a very useful one in an ABCP structure that is set up to securitize cash flows.
And the issuer of the ABCP is not going to be the originating company itself. For example, Ford uses a special-purpose vehicle to finance its auto receivables through the ABCP market. But the entity that issues the ABCP is called FCAR Owner Trust, and it's a bankruptcy remote entity. If you buy ABCP from FCAR Owner Trust, you have no claim on the assets of Ford Motor Company (or Ford Motor Credit Company)--on the other hand, if Ford goes down in flames, it won't directly effect holders of the FCAR ABCP because the trust owns the auto loans and cash flow goes from the borrower to the trust to the ABCP holders.
The ABCP market was originally developed to allow large, high-quality companies finance their trade receivables. It worked so well that the structure was used and modified to handle other financial assets.
posted by mullacc at 10:17 AM on November 12, 2008
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"The security itself [asset-backed commercial paper] is typically issued by a bank or other financial institution." - Investopedia
In recent times though, the Fed has been buying up commercial paper to keep money flowing to businesses.
posted by aheckler at 5:12 AM on November 12, 2008