As macroeconomic factors improve and regulatory uncertainty subsides, the U.S. asset-backed commercial paper (ABCP) sector and the U.S. asset-backed securities (ABS) sector have been positively affected by these conditions and currently exhibit stable trends. Because the same macroeconomic factors affect both markets, trends in the ABCP sector are typically similar to those in the ABS sector. For example, high economic growth, low unemployment rates, and steady consumer loan growth have a favorable impact on both markets. Similarly, both sectors are negatively affected by stricter regulation, including increased risk retention, disclosure, and capital requirements.

The expected increase in interest rates accompanied by a normal (or steeper upward-sloping) yield curve will likely make short-term borrowing more attractive compared to costlier long-term loans, which should benefit the short-term ABCP sector. A higher interest-rate environment generally incentivizes issuers to fund assets through the lower-cost funding that ABCP offers.

Unlike ABS, ABCP is unique because it offers investors the flexibility of "atypical paper" by offering different maturities, floating-rate notes, and other options via redeemable features, which can create efficiencies for banks to address their liquidity coverage ratio. As current pricing levels for ABCP have reached pre-crisis levels, this sector continues to offer a unique product to investors, as well as an alternative capital market-based funding source for banks. Thus, as the overall securitization market has evolved since the financial crisis, the ABCP sector will remain a viable funding source to fuel economic growth.

Despite challenges such as new regulations (including the Basel Committee on Banking Supervision's simple, transparent, and comparable securitizations framework and simple, transparent, and standardized securitization framework) and a flat yield curve, the Federal Reserve's interest rate hikes and robust economic growth could put wind in ABCP's sails. In December 2017, total commitment and invested amounts for S&P Global Ratings-rated ABCP conduits rose 9% and 2.5%, to $283.7 billion and $207.4 billion, respectively, from $259.7 billion and $202.4 billion in December 2015. By comparison, U.S. ABS issuance rose 25% to $229 billion in December 2017 from $183 billion in December 2015. In 2018, we expect ABCP outstanding to grow moderately to between $240 billion-$250 billion, and we expect total ABS issuance to be between $225 billion-$250 billion.

Chart 1

In this report, we review recent trends in S&P Global Ratings-rated U.S. ABCP market, including collateral composition backing ABCP, and compare these trends to those in the S&P Global Ratings-rated ABS sector. Each transaction funded in an ABCP conduit is either fully supported (where a liquidity support provider assumes all credit risk and typically funds for the face amount of the ABCP) or partially supported (where a liquidity support provider only funds for performing assets).

S&P Global Ratings receives monthly reports from ABCP conduit sponsors for the outstanding securitizations we rate. Based on our review of the data, we separated each asset/transaction into nine asset types:

Table 1

The ABCP data in this report is based on volume by commitment and invested dollar amounts rather than deal count for U.S. conduits rated by S&P Global Ratings. The ABS data in this report is based on volume by invested dollar amounts for U.S. ABS rated by S&P Global Ratings. The ABS forecasts and comparable actual issuance data is for the U.S. structured finance sector, not specifically for S&P Global Ratings-rated issuances.

Key Trends In ABCP Since Year-End 2015

Assets funded in the ABCP conduits have remained consistent since 2015, with the exception of the commercial (other) category, which increased to 44% in December 2017 from 34% in December 2015 (as a percentage of the invested amount; see charts 2, 3, and 4). Assets funded in this category are typically fully supported. Auto and trade receivables have continued to be the staple assets funded, where borrowers use the conduits as a significant alternative or sole source of funding. Newer assets, including personal loans and mobile handsets, included in the consumer (other) category, have increased in recent years, where ABCP conduits typically serve as testing grounds for investor appetite prior to ABS issuance. In 2017, securitized personal loans were $7.2 billion and mobile handsets were $6.6 billion (from one issuer). Other assets--such as student loans, credit cards, and mortgages--have been negatively impacted by the macroeconomic factors specific to their industry, thus representing a smaller percentage of assets funded in the conduits.

Chart 2

Chart 3

Chart 4

Other key trends:

• ABCP invested amounts have exhibited a stable trend since December 2015 (see chart 1), and we expect invested amounts to remain stable with a moderate increase in 2018.
• Commercial (other) is the largest category funded in the ABCP portfolio, representing 44% of total ABCP invested amounts. Varied esoteric assets are included in this category--namely franchise loans, rail cars, containers, timeshares, and others--which individually represent a small percentage, and assets like capital calls are generally funded in the ABCP conduits. The 31% increase in the invested amounts to $91.6 billion in December 2017 from $69.7 billion in December 2015 was primarily due to a higher number of repos, other derivative-backed transactions, and commercial loans and lease transactions since 2015.
• Auto assets dominate the ABCP portfolio, representing 26% of total ABCP invested amount in December 2017. Large auto issuers typically rely on ABCP conduits as an essential alternative source of funding.
• ABCP backed by trade receivables comprised 8% of the total ABCP invested amount in December 2017. Trade receivables, a staple asset for the conduits, continue to be almost exclusively funded by ABCP conduits. Given trade receivable originators' relatively smaller deal sizes compared to other assets, ABCP is a cheaper alternative funding source than issuing term paper, which adds to these entities' cost of borrowing.
• Although the consumer (other) category comprised only 6% of total ABCP invested amounts in December 2017, it increased dramatically, by 47%, since December 2015. The increase was fueled primarily by the addition of receivables backed by newer assets such as mobile handsets and other unsecured consumer loans, including marketplace lending.
• Total ABCP invested amounts for credit card receivables comprised 4% in December 2017. ABCP invested amounts for credit card receivables have been significantly affected by regulations and economic uncertainty after the financial crisis. Even though ABS credit card issuance has increased in recent years, ABCP funding has been low as banks continued to fund these assets via low-cost deposits.
• Total ABCP invested amounts for student loans decreased to 3% in December 2017. Student loans have decreased primarily due to macro factors affecting this asset class, specifically the discontinuation of the Federal Family Education Loan Program (FFELP) since 2010 and the government's direct lending program. Loans from the direct lending program are not currently securitized; thus, funding in the ABCP conduits have continued to decline compared to historical levels.

ABCP Compared With ABS By Asset Type

The sections below provide details for specific asset types that comprise a large percentage of total ABCP invested amount, namely consumer autos, trade receivables, commercial auto and equipment, credit cards, and student loans. For comparison, we provide the ABS invested amount in the same sectors.

Consumer Auto (Loans And Leases--Prime, Nonprime, And Subprime)

Table 2

Chart 5

Key trends:

• Large auto issuers typically rely on ABCP conduits as an essential alternative source of funding. Auto receivables comprised the largest portion of assets financed by ABCP conduits at 26% in December 2017. ABCP backed by auto receivables commitment and invested amounts have exhibited a relatively stable trend, averaging $82 billion and $59 billion, respectively, and utilization rates averaging 72% between December 2015 and December 2017. ABS auto invested amounts exhibit a similar trend, albeit at higher levels, averaging $102 billion during this period.
• In 2017, ABS auto issuance was flat compared with 2015, at $89 billion for both years. ABS auto issuance is expected to grow modestly to $95 billion in 2018. Stable trends in auto loan ABS reflect positive macro factors, which include low unemployment, low interest rates, and steady consumer loan growth. The ABCP sector will benefit from the same macro factors as well.

Trade Receivables

Table 3

Chart 6

Key trends:

• Trade receivables are almost exclusively funded by ABCP conduits, as S&P Global Ratings currently rates only one U.S. ABS trade receivables transaction with an invested amount of $51 million in December 2017. ABCP backed by trade receivables comprised 8% of the total invested amount in December 2017. Utilities, technology, food and beverage, health care equipment, and diversified financials are some of the industries originating trade receivables.
• ABCP commitment and invested amounts decreased 26% and 27%, respectively, from December 2015 through December 2017. The decline in commitments resulted from fewer trade receivable transactions funded within the conduits, which fell to 189 in December 2017 from 258 in December 2015. Utilization rates have averaged 61% during the same time.

Commercial Auto And Equipment

Table 4

Chart 7

Key trends:

• ABCP conduits are an important funding source for commercial auto and equipment issuers' overall financing strategy, where conduits' facilities often serve as warehouses before the assets are included in term ABS issuances, similar to autos and some other assets.
• ABCP backed by commercial auto and equipment assets comprised 6% of total ABCP invested amounts. Commitment and invested amounts in this asset class decreased 7% and 18% in December 2017, respectively, while utilization rates decreased to 54% from 61%. ABS invested amounts decreased 16% during this period. The variations in ABCP outstanding may be impacted by the timing of ABS term deals, which causes conduit funding to decrease or vice versa.
• Overall, ABS commercial auto and equipment issuance totaled $32 billion in 2017, significantly higher than it was in 2015 at $25 billion. The primary factor driving the increase was continued issuance from new issuers that entered the market over the past five years, along with increased fleet issuance. We expect ABS commercial auto and equipment issuance volume of between $30 billion-$35 billion for 2018, which may have a favorable impact on ABCP conduit funding.

Credit Card Receivables

Table 5

Chart 8

Key trends:

• Despite higher ABS credit card issuance in recent years, ABCP funding in credit cards has continued to be low because banks have continued to fund these assets via low-cost deposits. ABCP backed by credit card receivables comprised 4% of the total invested amount in December 2017, exhibiting a downward trend. ABCP commitment and invested amounts decreased 18% and 22%, respectively, between December 2015 and December 2017.
• In contrast, ABS credit card invested amounts decreased 9% to $127 billion from $140 billion during the same period.
• ABS credit card issuance has been increasing since 2015. Total issuance rose to $47 billion in 2017 from $25 billion in 2015. We project issuance to be between $40 billion-$50 billion for full-year 2018. Factors contributing to greater volume continue to be ongoing low cost of funds, diversification of funding sources, loan growth, investor demand, and refinancing of maturities. As interest rates rise and deposits become more expensive, banks may have more incentive to use securitization as an alternative funding source.

Student Loans

Table 6

Chart 9

Key trends:

• The downward trend in the ABCP and ABS sector for student loans reflects the macro factors affecting this asset class, specifically the discontinuation of the FFELP since 2010 and the reduction in private student loan ABS issuance. Historically, new student loan ABS origination volumes tracked the trends in college enrollment and the ever-increasing cost of education. This trend changed in 2010 when the FFELP was discontinued and the government's direct lending program took over all funding of guaranteed student loans. Loans from direct lending are not securitized currently. Thus, despite $1.4 trillion in outstanding student loan debt as of December 2017, which increased from $1.3 trillion as of December 2015 (per Fed data), ABS and ABCP invested amounts have continued to decline. In 2017, ABS student loan issuance totaled $15 billion, moderately higher than $14 billion in 2015.
• ABCP backed by student loans comprised 3% of total invested amount in December 2017. Student loans are primarily funded through the ABS term market rather than ABCP conduits. As of December 2017, the ABS invested amount for student loans was $141 billion while the ABCP invested amount was $7 billion.
• ABCP invested amounts for student loans decreased 42% in December 2017 from December 2015. This trend in declining invested amount is comparable to the ABS sector, however, at a slower pace of 16% during the same period. For 2018, we expect student loan ABS issuance volume to be flat or increase moderately, at $15 billion-$20 billion.

We Expect Continued Momentum For Both Sectors Throughout 2018

Total issuance in the U.S. ABS sector increased 20% to $229 billion in 2017 over the prior year. Higher consumer lending benefited the consumer sector in general, and we expect this momentum to continue in 2018. S&P Global Ratings forecasts overall ABS issuance of $225 billion-$250 billion in 2018. The positive trends in the ABS sector are expected to benefit the ABCP sector as well. We forecast the ABCP market to grow moderately to $240 billion-$250 billion from $243.5 billion in 2017 (non-seasonally adjusted). Additionally, ABCP conduits are positioned to overcome the recent headwinds related to a sustained low interest-rate environment and new regulations.

Related Research

• Inside North American ABCP: December 2017, Feb. 23, 2018
• Global Structured Finance Outlook 2018: Volume Could Reach $1 Trillion If Steady Economic Conditions Persist, Jan. 3, 2018
• Global Structured Finance Year In Review: 2017, Dec. 14, 2017