Asset-backed commercial paper (ABCP) outstanding in the U.S. peaked between March and April as alternative funding sources for liquidity became scarce and the term market was relatively inaccessible during that time. However, as some market liquidity returned, volumes have decreased from this peak. We expect growth in new seller activity to improve and issuance from recently launched conduits to gain momentum amid COVID-19-related uncertainties. In Europe, the Middle East, and Africa (EMEA), ABCP outstanding declined in the first six months, although committed funding amounts increased, indicating that long-term interest remains positive. Even so, we expect issuance volumes to be lower this year due to the economic impact of the pandemic. In the Asia-Pacific ABCP market, diverging trends emerged. China saw the first ABCP issuance in June, while in Australia, programs we rate wound down or had their ratings withdrawn at the request of the sponsors. In Japan, total ABCP outstanding as of June picked up 45% to ¥303.36 billion since December 2019.

Overall, we expect slower issuance growth through the rest of the year due to the ongoing market uncertainties. As economic conditions improve, issuance volumes may pick up more gradually.

COVID-19: ABCP Ratings May Be Affected By Bank Rating Changes

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

For fully supported ABCP programs, we consider COVID-19 credit-related sensitivity to be secondary as opposed to primary. This is because, given the full support, ratings on these programs are weak-linked to the issuer credit ratings on the liquidity facility provider, whereby rating actions are generally driven by those on the dependent counterparty (i.e., the liquidity facility provider, in this case). A change in the rating outlook for a liquidity provider would not affect the ratings on the ABCP. However, a downgrade of the liquidity provider or a CreditWatch placement, which could affect the short-term rating on the liquidity provider, could affect the rating on the ABCP.

Financial institutions in many banking jurisdictions have been affected by negative rating momentum since COVID-19 emerged this year. Even for jurisdictions that have been more resilient, our outlook for the banking sector's credit metrics are uniformly weaker. We expect that many banking jurisdictions won't fully recover until 2023 or beyond, with regulatory and government support globally also shaping their recovery. Despite this negative outlook, strengthened balance sheets, government support to retail and corporate markets, and our base case of a sustained economic recovery may limit bank downgrades this year.

We assessed the sensitivity of the rating on a fully-supported conduit to a change in the issuer credit rating on the support provider. For this purpose, we considered the outlook and our mapping of long-term ratings to short-term ratings. For example, for an 'A-1' rated conduit, if the support provider is rated A/Negative/A-1, there could be an impact on the conduit rating. Given the negative outlook, even a potential one-notch downgrade of the support provider to 'A-' corresponds to an 'A-2' short-term rating. On the other hand, should the support provider be rated A/Stable/A-1 or A+/Negative/A-1, we can reasonably expect the conduit rating to be unaffected. Both a stable outlook and one or more unused notches on the long-term rating will prevent the short-term rating from being affected, which will limit the potential impact on the conduit rating. Based on our sensitivity analysis (refer tables 1 and 4 and the Appendix), about a fifth of fully supported conduits in the U.S. and EMEA could be affected by a change in the issuer credit rating on the support provider in the second half of the year. Considering this, we expect limited impact on our ratings on fully supported ABCP conduits for the remainder of the year.

For partially supported ABCP, we also consider asset performance in our analysis. Currently, we consider the collateral performance outlook weaker for subprime auto loans and unsecured consumer loans, and rating trends stable to somewhat negative. For all other asset types, the outlook remains somewhat weaker. Our base-case loss assumptions for all the partially supported transactions are higher than the current loss performance and reflect our view of expected performance during multiple economic scenarios specific to the asset-backed securities (ABS) sector.

In the last six months, the ratings on programs in the U.S. have remained stable. In EMEA, we lowered the ratings on one conduit, driven by a downgrade of the support provider. We continue to monitor any deterioration in issuer credit ratings as well as collateral performance over time.

Interest In ESG Assets Unabated

While we continue to observe increased interest in ABCP programs backed by assets viewed as having strong environmental, social, and governance (ESG) credentials, in our view, hurdles remain before there is widespread adoption of ESG in structured finance. Specifically for ABCP, the ESG credentials of the sponsor, administrator, or liquidity provider could also be materially different from the underlying asset or seller, or the seller's obligors (see "Related Research" section).

LIBOR Phase-out Does Not Affect Outstanding ABCP

The London Interbank Offered Rate (LIBOR) phase-out by the end of 2021 will have a minimal impact on ABCP issuance, as the majority of ABCP is fixed rate and not indexed to LIBOR. When ABCP is indexed to LIBOR, we tend to see fallback language, such as the Federal Reserve's funds rate, prime rate, or the Secured Overnight Financing Rate (SOFR), typically included in the program or transaction documents. In addition, for collateral backing ABCP that uses LIBOR as the referenced rate, the potential basis mismatch between assets and liabilities is mitigated by rollover, as ABCP is continuously offered. Furthermore, ABCP generally benefits from a committed liquidity facility to make timely payment of interest and principal on maturing ABCP at the commercial paper rate, which is widely accepted in the market and is inherently an alternative reference rate to LIBOR.

U.S.: Year-End Projections Are Intact Despite COVID-19 Market Impact

Dev Vithani, New York, (1) 212-438-1714; dev.vithani@spglobal.com  

Cathy C de la Torre, New York, +1 (212) 438-0502; cathy.de.la.torre@spglobal.com  

U.S. ABCP outstanding reached a peak of approximately $272 billion between March and April partly due to a relatively inaccessible term market, the dire need for companies to access short-term liquidity, as well as issuance from newer conduits. While U.S. sponsors were able to issue during this stressed period, albeit at higher pricing and shorter tenors, there were some draws under liquidity facilities. ABCP outstanding has since declined about 11.5% to $241 billion as of Sept. 30, 2020, as alternative sources of liquidity funding became more available, which likely pressured ABCP issuance. We expect that as COVID-19-related market uncertainties continue to wane, there will be more new seller activity in ABCP programs, with new ABCP-financed origination to exceed the wind-down of existing transactions. ABCP spreads, in general, have narrowed, reducing the need for banks to fund via liquidity draws or other credit facilities. At the same time, U.S. sponsors are anticipating increased issuance of recently launched conduits, all of which support overall higher outstanding issuance to our projected levels of approximately $260 billion by year-end.

Chart 1

In the last six months, our ratings on ABCP outstanding remained stable. Since April 2020, we have rated notes and certificates issued by two new programs: Ionic Capital II Trust in June 2020 and Britannia Funding Co. LLC in September 2020. Ionic Capital II Trust is a conduit that uses proceeds from issuance of notes and certificates to purchase a portfolio of eligible underlying equities in the open market and enter into total return swap agreements with rated counterparties. Britannia Funding Co. LLC is a conduit that uses proceeds derived from global master securities lending or repurchase agreements as well as a total return swap to purchase U.S. Treasuries and loans to banks to hold as high-quality liquid assets. In September, we withdrew our ratings on short-term notes issued by Collateralized Commercial Paper Co. LLC and Collateralized Commercial Paper II Co. LLC, administered by Global Securitization Services LLC and sub-administered by JPMorgan Chase Bank N.A., at their request (see chart 1).

Ratings sensitivity in U.S. ABCP programs

We have assessed the impact on the ratings on outstanding ABCP programs separately for fully supported and partially supported conduits. Our ratings on fully supported ABCP conduits are weak-linked to the issuer credit rating on liquidity facility providers.

The near-term outlook for the U.S. economy remains challenging given the still-high levels of COVID-19 infections, together with no agreement in extending emergency COVID-19 relief. We expect it to contract 4.0% in 2020 and see downside risk to our forecast for a 3.9% recovery in 2021. However, the stress in the financial markets has subsided since the steep increase at the start of the pandemic. The Fed has communicated strongly that it will do "whatever it takes" and increased its asset purchases significantly. On the banking front, given the pandemic pressures, the outlook bias on bank ratings has turned markedly negative since April 2020. However, most rated U.S. banks remained profitable--albeit at lower levels--partially due to good cost control.

As for liquidity, both on-balance-sheet and contingent liquidity remain strong, supported by good cash and investment balances. Overall, good capital and liquidity, support from authorities to retail and corporate markets, and our base case of a gradual economic recovery should limit bank downgrades this year.

Currently, we consider that less than 20% fully supported conduits could be affected based on the issuer credit rating on the liquidity support provider for these conduits (see table 1 and Appendix). In a recessionary scenario, we continue to expect stable rating performance for U.S. ABCP based on the high-investment-grade ratings on bank sponsors and extensive experience of nonbank sponsors.

Table 1

Partially supported assets sensitivity in U.S. ABCP programs  

Ratings on partially supported ABCP programs remain sensitive to asset performance, specifically for subprime auto and consumer loans, for which the collateral performance outlook is relatively weaker in the current economic environment. Despite the weaker collateral performance trends for U.S. ABS, we expect stable to somewhat negative ratings trends in these sectors. Our view considers the low exposure levels (see table 2), the ample weighted average loss coverage multiples from credit enhancement (see table 3) for various partially supported assets, and the availability of 8%-10% fungible program-wide credit enhancement for these programs. Because of these factors, we believe that the overall impact on the ratings on programs with investments in these assets will be limited.

Table 2

Table 3

We will continue to monitor any impact on our conduit ABCP ratings as a result of the economic implications from the COVID-19 pandemic. We will also continue to surveil monthly performance on all of the partially supported transactions against our base-case loss assumptions monitoring any weakness in the collateral over time.

Key trends in program composition

U.S. dollar-denominated issuances in 2020 accounted for the majority of the ABCP outstanding in the U.S., with 98% denominated in U.S. dollars, while the rest of the issuances were denominated in euros and British pound sterling (see chart 2).

As of June 2020, traditional assets--such as auto loans and leases, credit cards, student loans, consumer loans, and equipment loans and leases--made up about half of the collateral in all conduits (see chart 3) and 83% of the collateral in partially supported programs (see Appendix). The three largest sponsors, Citibank, JPMorgan, and Royal Bank of Canada, represent the eight partially supported programs totaling $55.4 billion ABCP outstanding and make up 26% of the total U.S. ABCP that we rate (see Appendix). The remaining 43 currently active programs in the U.S. are fully supported and total about $163.5 billion, or 74% of the total U.S. ABCP that we rate (see Appendix).

Chart 2

Chart 3

EMEA: Issuance Momentum Pauses In 2020

Florent Stiel, Paris, (33) 1-4420-6690; florent.stiel@spglobal.com  

Matthew S Mitchell, CFA, London, (44) 20-7176-8581; matthew.mitchell@spglobal.com  

The total S&P Global Ratings-rated ABCP outstanding as of June 2020 from conduits domiciled in EMEA declined 8.45% over 2019, to $90.63 billion, in line with our expectation, considering the contraction in the eurozone economy in the first six months. We understand that these securities are also not covered under the emergency purchase programs, extended by central banks over the last few months. While we did not rate any new conduit in the first half of the year, we withdrew our ratings on Silver Tower Funding Ltd. in April. Committed funding amounts however increased a modest 2.14%, indicating that despite lower issuances in the current macroeconomic environment, longer-term commitments within the programs remain resilient (see chart 4). Utilization rates therefore remained comparatively lower in the first half of the year.

Given the expected impact of COVID-19 on the financial sector, we believe new issuance from conduits will be muted in the short term, with new seller additions potentially returning to pre-COVID-19 levels once more normal operating conditions return. On the regulatory front, the securitization disclosure templates developed by the European Securities and Markets Authority became effective on Sept. 23, 2020, and apply to the ABCP market as well. Consequently, any new information available in relation to ABCP conduits must be disclosed as per these templates.

Chart 4

Ratings sensitivity in EMEA ABCP programs

All issuances from conduits domiciled in EMEA are currently fully supported by liquidity. This means that our ABCP ratings are weak-linked to the issuer credit ratings on the liquidity providers, or in the case of conduits funding investment contracts, the minimum issuer credit rating on the series counterparties. As such, we consider ABCP ratings to be secondary risk to COVID-19 in EMEA, as the underlying asset credit quality is not material to our analysis.

Although our economic outlook is less pessimistic than earlier in the year, short-term risks remain, as we forecast a contraction of 7.4% and 9.7% in the eurozone and U.K., respectively, in 2020. Based on our recent review, we consider recovery of banking jurisdictions to pre-COVID-19 levels will be slow, uncertain, and highly variable across sectors and geographies, with prominent banking systems including U.S. and several European countries likely not recovering until 2023. The scale of credit losses for European banks will depend on how fast the economy recovers. A softer, longer recovery would test the resilience and weigh on bank ratings. After a slew of European bank rating actions in the spring, we have taken very few since, with 45% of the ratings on larger European banks having negative outlooks. Asset quality remains central to their future profitability and capitalization. However, comparability of loan book quality and provisioning metrics is poor, and the impact is unlikely to become fully clear until late 2020 at the earliest. In time, we expect divergent patterns to emerge, whether between national banking systems or between domestic peers. We therefore continue to look for a differentiated view among rated European banks, focused on both their short- and long-term health, and we will take rating actions accordingly. Based on total ABCP outstanding as of June 2020, U.S.- and Japan-based financial institutions provide liquidity facilities for about 12% of the conduits we rate, with the rest provided by European banks.

During the first six months, we lowered the ratings on Chesham Finance LLC segregated commercial paper series IV to 'A-1' from 'A-1+', as the short-term rating on HSBC Bank PLC, as the support provider, was lowered. Other than this, the ratings on all other ABCP programs we rate remained stable in the first half of the year. Although we anticipate that ABCP conduit ratings in EMEA will remain largely stable over the next six months, we have assessed their sensitivity to rating changes (see table 4 and Appendix). Currently, we expect that about six conduits could be affected by a change in the issuer credit rating on the support provider. We will continue to monitor any impact on our ratings on the conduits as a result of the economic implications from the pandemic.

Table 4

Key trends in program composition

More than 99% of the ABCP outstanding issued by European conduits are denominated in U.S. dollars, euros, and British pound sterling. Despite the decline in total volumes, U.S.-denominated issuances picked up after a decline in the share of euro-denominated issuance during the first six months. The share of British pound sterling-denominated ABCP issuances remained stable (see chart 5). The share of total ABCP outstanding funded by single-seller programs climbed 3% over 2019 to about 14%, which was partly due to issuances from the single-seller programs we rated in 2018 and 2019. Similarly, the share of 'A-1+' rated programs improved, although we lowered our rating on a program previously rated 'A-1+' to 'A-1', as indicated previously. Meanwhile, the share of 'A-2' rated programs fell slightly (see Appendix).

Total asset investments in EMEA declined almost 6% over 2019, with sharp double-digit declines in trade receivables and auto, offset to some extent by increases in commercial and consumer assets (see chart 6). Of all assets, over four-fifths remain domiciled across various regions within EMEA.

Chart 5

Chart 6

Asia-Pacific: Issuances Up In Japan, First ABCP Launched In China

Japan

Toshiaki Shimizu, Tokyo, (81) 3-4550-8302; toshiaki.shimizu@spglobal.com 

ABCP is a traditional form of securitization in Japan. Currently there are two ABCP programs outstanding, which were established by AOI Funding Corp. and Apex Funding Corp. Both conduits are multi-seller programs fully supported by Japanese banks--The Shizuoka Bank Ltd. and MUFG Bank Ltd.--based on the liquidity and credit facility agreement. Therefore, the ratings on both programs remain linked to our short-term credit ratings on the banks. These conduits are set up to finance their acquisition of assets such as trade receivables by issuing yen-denominated ABCP. There have been no specific changes since 2012. Currently, there are no scheduled legal or regulatory changes that would affect ABCP issuances in the Japanese market.

In 2009, there were four ABCP programs in Japan. We withdrew our ratings on two programs in 2012 following their closure and upon the related transaction party's request (see chart 7).

Chart 7

Total ABCP outstanding in June 2020 increased 45% to ¥303.36 billion since December 2019. However, issuance volumes continue to remain well below historical highs. Utilization rates in Japan have been low, compared to global trends, likely because of the current lending environment and availability of credit. To date, all issuances by Japanese conduits have been denominated only in Japanese yen.

China

Jerry Fang, Hong Kong, (852) 2533-3518; jerry.fang@spglobal.com  

China's inaugural ABCP issuances were launched in June 2020, comprising five deals totaling 3.32 billion renminbi (US$486 million). The underlying assets are mainly composed of trade receivables. The issuances mostly stem from regulatory support to the real economy by broadening funding sources for corporations in China.

Based on public information, key participants in these transactions are either local banks or securities firms. These transactions seem to be set up as stand-alone ones, unlike typical ABCP conduits, of which commercial banks act as sponsors and continue to source assets to be funded by issuing ABCP over the life of the programs.

We believe it is too early to say how the ABCP sector will develop in China in the next two to three years. That said, if regulators continue to promote them, the potential could be huge in the long run given China's sizable economy, the funding needs of Chinese companies, and its robust securitization market. New securitization issuance in China amounted to approximately US$337 billion in 2019, ranking second globally and only trailing the U.S.

Australia

Justin Rockman, Melbourne, (61) 3-9631-2183; justin.rockman@spglobal.com  

Total ABCP outstanding had been winding down over the last few years. As of June 2020, all Australian and New Zealand ABCP programs have wound down or had their ratings withdrawn at the request of the sponsors. We don't anticipate much activity in the near term in this market.

Global Top 10 Sponsors

Globally, as of June 2020, the top 10 sponsors are concentrated in the U.S. and EMEA. They formed about 71.5% of the S&P Global Ratings-rated ABCP issuances outstanding in these two regions, down 2% from 73.5% since December 2019. The top three sponsors hold about 35% of the total issuance volumes in the U.S. and EMEA, largely stable since December 2019.

In the U.S, the top 10 sponsors, administrators, and managers accounted for 84.1% of the total ABCP outstanding as of June 2020 (see Appendix). Three of the top 10 sponsors and administrators accounted for about 25% of the total ABCP outstanding in eight partially supported conduits as of June 2020 (see Appendix). The top 10 liquidity providers provided a combined commitment of approximately $226.2 billion, or 71.5%, of the $316.5 billion of support available for the U.S. ABCP that we rate.

In EMEA, the top 10 sponsors of the outstanding ABCP issuances accounted for 89.4% of the total ABCP outstanding as of June 2020, 1% below 90.4% as of December 2019 (see Appendix). The top 10 liquidity providers provided a combined commitment of approximately $101.4 billion, or 80%, of the $126.7 billion support available for the EMEA ABCP that we rate.

Rating Actions

• New Issue: Britannia Funding Co. LLC, Sept. 28, 2020
• New Issue: Ionic Capital II Trust, June 17, 2020
• Rating Lowered On Chesham Finance Ltd./Chesham Finance LLC Segregated CP Series IV Following Support Provider Downgrade, May 18, 2020

Related Research

• EMEA Structured Finance Surveillance Chart Book, Oct. 7, 2020
• As The Deadline For The Transition From LIBOR Approaches, Work Remains For U.S. Structured Finance, Oct. 6, 2020
• Friday Credit Focus: The Shape Of Recovery, Oct. 2, 2020
• Managing Through The Crisis, Europe’s Banks Look To The Future, Sept. 28, 2020
• COVID-19 Activity In Global Structured Finance As Of Sept. 18, 2020, Sept. 24, 2020
• Economic Research: The U.S. Economy Reboots, With Obstacles Ahead, Sept. 24, 2020
• U.S. And Canada Structured Finance Surveillance Chart Book, Sept. 24, 2020
• Economic Research: The Eurozone Is Healing From COVID-19, Sept. 24, 2020
• Global Banking: Recovery Will Stretch To 2023 And Beyond, Sept. 23, 2020
• “Where Do We Go From Here?”: Highlights From S&P Global Ratings’ 2020 European Structured Finance Conference, Sept. 14, 2020
• The ESG Pulse: The Search For A Vaccine, Aug. 31, 2020
• China Securitization Performance Watch 2Q 2020: The Worst May Have Passed, Aug. 11, 2020
• S&P Global Ratings Definitions, Aug. 7, 2020
• The ECB Takes Comfort In Likely Eurozone Banks Resilience, July 29, 2020
• European Structured Finance Outlook H2 2020: Weathering The Storm, July 28, 2020
• Global Securitization 2020 Issuance Forecast Trimmed By A Quarter, Now At $830B, July 21, 2020
• Global Banks Outlook Midyear 2020: Temporary Shock Profound Implications, July 9, 2020
• Credit FAQ: How COVID-19 Is Affecting ABCP, June 12, 2020
• How COVID-19 Is Affecting Bank Ratings: June 2020 Update, June 11, 2020
• COVID-19 Is Testing The Resilience of Global Structured Finance, May 18, 2020
• How COVID-19 Is Affecting Bank Ratings, May 7, 2020
• Inside Global ABCP: Ratings Remain Stable Under COVID-19 Related Market Uncertainties, April 21, 2020
• Assessing The Potential Credit Effects Of COVID-19 On U.S. ABCP, April 9, 2020
• Credit FAQ: How Will COVID-19 Affect Japanese Structured Finance?, April 8, 2020
• Inside Global ABCP: Expanding Portfolios Underpin Steady Issuance, Though Market Uncertainties Persist, Oct. 23, 2019
• ESG Credit Factors In Structured Finance, Sept. 19, 2019
• Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

Appendix

The appendix tables are available here: https://www.spglobal.com/ratings/_division-assets/excel/106InsideABCPOctober.xls