Asset-backed commercial paper (ABCP) outstanding in the U.S. peaked in March-April 2020 as alternative funding sources for liquidity became scarce and the term market was relatively inaccessible during that time. However, improved access to other sources of funding in the second half of 2020 muted growth in ABCP issuance. S&P Global Ratings expects issuance to remain stable or go up slightly this year, in view of a modest projected rebound in the U.S. economy, ongoing market uncertainties, softer job market, low interest rates, and strong bank deposits relative to loans.

In Europe, the Middle East, and Africa (EMEA), outstanding ABCP surpassed $100 billion, with strong issuance activity in the second half of the year. Growth in committed funding amounts was also at a three-year high, indicating that long-term interest remains positive. Despite market uncertainties, ABCP issuance by conduits financing investment contracts has grown steadily. Overall, we expect stable issuance this year, depending on overall economic conditions, the pace of recovery, and availability of liquidity.

In Japan, we withdrew our ratings on one of the two remaining ABCP programs in 2020 on the related transaction party's request.

COVID-19: Potential Impact From Bank Rating Changes Moderates

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing 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 indirect rather than a direct ratings driver. This is because, given the full support, ratings on these programs are weak linked to the ratings on the liquidity facility provider, and rating actions on the ABCP generally stem from rating changes on the liquidity facility provider. A change in the rating outlook on 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 the COVID-19 pandemic began last year. However, the outlook for U.S. banks has improved since the start of 2021. This supports a stable outlook on most rated U.S. banks and reduces downgrade risk for about one-quarter of bank ratings carrying negative outlooks. In EMEA, our ratings still have a heavy negative bias, with about 40% of our outlooks on large European banks still negative, reflecting higher economic risks, structural profitability, and--for some banks--multiple other factors.

We assess the sensitivity of the rating on a fully supported conduit to a change in the 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 is a relatively higher risk of an impact on the ABCP rating. Given the negative outlook on the support provider, even a potential one-notch downgrade 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, there is less risk of the ABCP rating being affected. 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 (see tables 1 and 4 and the Appendix), about 12.2% of fully supported conduits in the U.S. and around 13.8% in EMEA could be affected by a change in the credit rating on the support provider, down from about 20% in both the U.S. and EMEA in June last year. Considering this, we expect a limited impact on our ratings on fully supported ABCP conduits over the next six months.

For partially supported ABCP, we also consider asset performance in our analysis. Currently, we consider the collateral performance outlook to be weaker for unsecured consumer loans, and rating trends stable to somewhat negative. On the other hand, for prime auto loans, auto lease, and auto dealer floorplan, we consider both collateral performance outlook and rating trends to be stable. For all other asset types, the outlook remains somewhat weaker but rating trends largely stable. 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.

The ratings on programs in both the U.S. and EMEA remained stable during the last six months. We continue to monitor any deterioration in ICRs and collateral performance over time.

Resolution Counterparty Ratings Versus ICRs On Support Providers in ABCP

Typically, the applicable counterparty rating is either the issuer credit rating (ICR) or the resolution counterparty rating (RCR), if relevant, depending on the obligation of the support provider. The RCR reflects our opinion of the relative default risk of a bank's certain senior liabilities that may be protected from default should the bank be subject to a bail-in resolution (see "Methodology For Assigning Financial Institution Resolution Counterparty Ratings," published April 19, 2018).

We assign RCRs to banks in a number of countries across the EU and in Switzerland, the U.K., and the U.S., and differences in bail-in legislation across the major jurisdictions mean that the universe of RCR liabilities differs markedly between them. Secured liabilities, such as repurchase agreements and collateralized derivatives, would typically qualify for an RCR in most jurisdictions, if the counterparty's obligations are fully collateralized.

In considering whether a support provider would qualify for an RCR, we will review any collateralization provisions under the contract and the frequency of the mark to market. To the extent any unsecured exposure to the counterparty remains, the ICR would generally be the applicable rating type. Other forms of support in ABCP programs, such as liquidity facilities, are typically structured as unsecured funding commitments, which would not be explicitly excluded from bail-in. Therefore, we typically weak link the ratings on the ABCP to the ICR on the liquidity provider.

U.S.: Availability Of Alternative Funding Mutes Issuance Growth

We expect issuance volumes for U.S. ABCP to remain stable or increase moderately in 2021 to $255 billion-$260 billion from current levels ($247.3 billion as of April 21, 2021). According to the Federal Reserve (the Fed), U.S. ABCP outstanding increased only 0.6% to $256.3 billion in 2020 from $254.8 billion in 2019, while reaching interim highs of approximately $272 billion during the height of the pandemic last April. The increase stemmed from a relatively inaccessible term market and companies' need to access short-term liquidity.

ABCP issuance came under some pressure in the latter half of 2020 as alternative funding sources of liquidity became more available. Issuance growth will likely remain muted due to several factors: ongoing market uncertainties, a modest projected rebound in U.S. real GDP following a contraction in 2020, elevated unemployment levels that are not expected to reduce to near prepandemic levels until 2024, a low-interest-rate environment with the benchmark federal funds rate not expected to increase until third-quarter 2023, and robust levels of bank deposits relative to loans.

Chart 1

Cheap deposit funding and the yield curve are dampening issuance

At the start of the pandemic, banks (which typically serve as sponsors and administrators for ABCP programs) had low nonperforming assets, sound capital, and liquidity. Despite a tough 2020, they posted decent profitability while restrictions on shareholder payouts helped boost capital ratios. However, banks have generally reported low- to mid-single-digit loan growth and have had fairly strong deposits relative to loans. Therefore, their need for nondeposit funding, including ABCP, has been limited.

The Fed's loosening of monetary policy, including quantitative easing, injected more liquidity into the system and likely continued to hold back ABCP growth. As ultralow interest rates coupled with tepid loan growth hurt spread income, margins neared multi-decade lows in 2020 (see "Large U.S. Banks' Earnings Should Improve In 2021 While Profitability Will Lag Pre-Pandemic Levels," Feb. 17, 2021). Despite the momentum to boost economic activity, we don't expect the Fed to raise rates until third-quarter 2023, since it keeps a watchful eye on the overall economy, inflation targets, and labor market rates. That said, we do not expect a significant change in incentives for short-term funding such as ABCP until we begin to see a more permanent steepening of the yield curve.

Although it takes time for the ABCP market to experience the effects of a rate increase, ABCP is still a unique product to investors, especially in light of the Securities And Exchange Commission's recent amendments to expand the definition of "accredited investor" and "qualified institution buyer" in Rules 501(a) and 144A of the Securities Act, respectively. These amendments more effectively identify individual and institutional investors that have knowledge and expertise to participate in private capital markets, thereby expanding the list of eligible entities. The increase in potential buyers will raise the aggregate potential supply of capital while lowering transaction costs for current and prospective issuers from increased competition among investors for Rule 144A offerings. All of this facilitates capital formation in the market and further strengthens ABCP's role, not only as an alternative capital market-based funding source for banks, but also as a viable funding source to fuel economic growth.

Despite stable issuances, conduit level activity was strong

In the last six months, our ratings on ABCP outstanding remained stable. Since our last publication in October 2020, we have rated issuances from several programs (see Rating Actions section at the end of this report):

• Alinghi Funding Co. LLC (sponsored by Nearwater Capital) is a new fully supported conduit that uses proceeds derived from a master securities loan agreement, as well as total return swaps to purchase U.S. Treasuries and loans to banks, to hold as high-quality liquid assets.
• Aquitaine Funding Co. LLC (sponsored by Nearwater Capital) is a new fully supported conduit that uses proceeds from a global master securities lending agreement, as well as total return swaps to purchase U.S. Treasuries and loans to banks, to hold as high-quality liquid assets.
• Mackinac Funding Co. LLC (also sponsored by Nearwater Capital) is a fully supported conduit that introduced a new global master securities lending agreement to its existing structure containing lending agreements and total return swaps.
• Washington Morgan Capital Co. LLC (managed by Guggenheim Treasury Services LLC) is a new fully supported conduit that will issue U.S. dollar denominated ABCP notes to fund a variety of assets including asset-backed pools, securities, trade receivables, and other financial assets.
• Legacy Capital Co. LLC (sponsored by Guggenheim Treasury Services LLC) is an existing fully supported conduit that added callable, puttable, and callable/puttable ABCP.
• Concord Minutemen Capital Co. LLC (managed by Guggenheim Treasury Services LLC) is an existing fully supported conduit that added a Series C standard, callable, puttable, and puttable/callable ABCP to supplement the outstanding Series A and Series B notes.
• Lexington Parker Capital Co. LLC (managed by Guggenheim Treasury Services LLC) is an existing fully supported conduit that added callable, puttable, and puttable/callable ABCP to the outstanding standard ABCP (collectively, Series A).

In November 2020, we withdrew our rating on ABCP issued by Kells Funding LLC (sponsored by FMS Wertmanagement Services GmbH) at their request.

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 ICR on liquidity facility providers. With the passage of the $1.9 trillion fiscal stimulus and a steeper yield curve, the outlook for U.S. banks has improved since the beginning of the year. This supports the stable outlooks we have on most rated U.S. banks and may reduce downgrade risk on the roughly one-quarter of bank ratings with negative outlooks. Those negative outlooks largely reflect concentrated exposure to either consumer lending or business most hurt by the pandemic.

Currently, we consider that only about 12.2% of fully supported conduits could be affected based on the ICR on the liquidity support provider (see table 1 and Appendix). This is much lower than about 20% we anticipated in June last year. In a recessionary scenario, we continue to expect stable rating performance for U.S. ABCP in view of 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 unsecured consumer loans, for which the collateral performance outlook is relatively weak, and rating trends stable to somewhat negative, in the current economic environment. However, for prime auto loans, auto lease, and auto dealer floorplan, we consider both collateral performance outlook as well as rating trends to be stable. For all other asset types, the outlook remains somewhat weaker but rating trends largely stable (see table 2). We also reviewed key observations and concerns across these assets and the factors we consider support our view on the rating trends (see table 3).

Table 2

Table 3

Our view considers the low exposure (see table 4), ample weighted-average loss coverage multiples from credit enhancement (see table 5) 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 the overall impact on the ratings on programs with investments in these assets will be limited.

Table 4

Table 5

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 monitor monthly performance on all of the partially supported transactions against our base-case loss assumptions, including 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., at almost 98%, while the rest of the issuances were denominated in euros and British pound sterling (see chart 2). We currently rate ABCP issued by 50 programs in the U.S. Of these, six are rated 'A-1+' and 44 are rated 'A-1'. None of our ratings on liquidity providers supporting these programs are on CreditWatch negative, and a one-notch rating movement may not necessarily lead to a change to the short-term rating, based on our linking methodology (see "Methodology For Linking Long-Term And Short-Term Ratings," published April 7, 2017). In addition, five programs accounting for 10% of the total ABCP programs are supported by liquidity providers with negative outlooks and rated 'A/A-1'.

As of Dec. 31, 2020, three sponsors, Citibank, JPMorgan, and Royal Bank of Canada, represent the eight partially supported programs totaling $56.3 billion of ABCP outstanding, which make up 26% of the total U.S. ABCP we rate (see Appendix). The remaining 41 programs in the U.S. are fully supported and total about $160.3 billion, or 74% of the total U.S. ABCP we rate (see Appendix). As of April 2021, there are 42 fully supported conduits in the U.S.

As of Dec. 31, 2020, traditional assets--such as auto loans and leases, credit cards, student loans, consumer loans, and equipment loans and leases--made up about 43% of the collateral in all conduits (see chart 3) and 89% of the collateral in partially supported programs (see Appendix).

Chart 2

Chart 3

EMEA: Issuance Picked Up In H2, Surpassing $100 Billion

Last year, issuance growth jumped to a three-year high after remaining tepid for two years. As of Dec. 31, 2020, the total amount of ABCP outstanding that we rate, from conduits domiciled in EMEA, increased 7.2% over 2019 to $106.1 billion, the fastest growth since 2017. Issuance picked up mostly during the second half of the year, after contracting in the first six months due to the weak macroeconomic conditions. We understand the growth in ABCP stemmed from strong investor demand for short-term paper, largely from conduits funding investment contracts with highly rated financial institutions, as large amounts of government stimulus limited banks' funding requirements.

Although we did not rate any new conduit in 2020, we withdrew our ratings on Silver Tower Funding Ltd. in April. Growth of committed funding amounts also reached a three-year high at 7.5%, indicating resilience in longer-term commitments within programs, despite the prevailing macroeconomic conditions (see chart 4). Utilization rates remained largely in line with 2019. Overall, we expect stable issuance volumes this year, depending on the overall economic conditions, pace of economic recovery, and availability of liquidity.

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 our ABCP ratings are weak linked to the credit ratings on the liquidity providers or, in the case of conduits funding investment contracts, the lowest applicable credit rating on the series counterparties. As such, we consider ABCP ratings to have indirect exposure to COVID-19 in EMEA, since the underlying asset credit quality is not material to our analysis.

We expect GDP growth of 4.2% this year, since overall conditions point to a solid recovery in Europe in the second half of 2021. However, uncertainty remains, due to the prevalence of COVID-19 and vaccination rates. We are yet to see the full impact of the pandemic on banks' asset quality and ultimately provisioning requirements. Amid low interest rates, new provisioning, sluggish revenue growth, and adjustments needed for digital transformation, many European banks' management teams face ongoing pressure to take decisive measures to tackle their weak core profitability.

Our ratings retain a heavy negative bias, with about 40% on larger European banks still carrying negative outlooks, reflecting higher economic risks, structural profitability, and for some banks multiple other factors. We therefore continue to expect differentiation in the creditworthiness trend among rated European banks. Based on total ABCP outstanding as of Dec. 31, 2020, U.S.- and Japan-based financial institutions provide liquidity facilities for about 9.6% of the conduits we rate, with the rest provided by European banks.

During the first six months of 2020, we lowered our ratings on Chesham Finance LLC's segregated commercial paper series IV to 'A-1' from 'A-1+', since the short-term rating on HSBC Bank PLC, the support provider, was lowered. Other than this, the ratings on all other ABCP programs remained stable last 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 6 and Appendix). Based on our analysis, ratings on only about 13.8% conduits remain vulnerable to a change in the credit rating on the support provider, down from 20% in June. We will continue to monitor any impact on our ratings on the conduits as a result of the economic implications from the pandemic.

Table 6

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. The uptick in volumes resulted from U.S. and euro-denominated issuances. The increase in U.S. dollar-denominated issuance stemmed largely from conduits funding investment contracts. At the same time, we understand that due to lower liquidity in the foreign exchange swap market, preference to fund euro-denominated assets in the same currency improved euro-denominated issuances. The share of British pound sterling-denominated ABCP issuances remained largely stable (see chart 5). With much of the increase in the total ABCP outstanding funded by multi-seller conduits, the share of single-seller programs dropped to about 9.5% from 11% in 2019, despite stable issuances from these conduits. Similarly, issuances from 'A-1' rated programs improved, while the share of 'A-1+' and 'A-2' rated programs fell slightly (see Appendix).

Chart 5

Funding of investment contracts increases 16%

Total asset investments in EMEA rose 1.7% as of Dec. 31, 2020, compared with 2019, with increases in commercial and consumer assets, offset to some extent by a decline in trade receivables and autos (see chart 6). Although traditional assets such as trade receivables and autos continue to account for more than half the total asset investments, their share has steadily declined from about 67% in 2017. At the same time, we understand that the share of investment contracts such as repurchase agreements, total return swaps, and securities lending agreements, has risen to one-fifth of all asset investments. Total assets funded by conduits funding investment contracts has increased about 16%, to $27.5 billion over the last year, fueled by investor demand. This has improved total investments in commercial assets. Of all assets, over four-fifths remain domiciled across various countries in EMEA.

Chart 6

Japan: Overall Market Activity Is Stable

ABCP is a traditional form of securitization in Japan. Currently there is one ABCP program outstanding, which was established by Apex Funding Corp. The conduit is a multi-seller program fully supported by MUFG Bank Ltd. Therefore, the ratings on the program remains linked to our short-term credit ratings on MUFG Bank, Ltd. 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 and one program in 2020 on the related transaction party's request.

Utilization rates in Japan have been low, compared with 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.

Global Top 10 Sponsors

As of Dec. 31, 2020, the top 10 sponsors globally are concentrated in the U.S. and EMEA. They formed about 72.3% of S&P Global Ratings-rated ABCP issuances outstanding in these two regions, down 1.2% from 73.5% since December 2019. The top three sponsors hold about 36.2% of the total issuance volumes in the U.S. and EMEA, slightly higher than 35% in December 2019.

In the U.S, the top 10 sponsors, administrators, and managers accounted for 82.1% of the total ABCP outstanding as of December 2020 (see Appendix). Three of the top 10 sponsors and administrators accounted for about 30.6% of the total ABCP outstanding in eight partially supported conduits as of December 2020 (see Appendix). The top 10 liquidity providers provided a combined commitment of approximately $189.9 billion, or 83.6%, of the $227.2 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 88.8% of the total ABCP outstanding as of Dec. 31, 2020, versus 90.4% as of Dec. 31, 2019 (see Appendix). The top 10 liquidity providers represented a combined commitment of approximately $108.2 billion, or 79.5% of the $136.1 billion support available for the ABCP we rate in EMEA.

Rating Actions

• New Issue: Washington Morgan Capital Co. LLC, April 16, 2021
• New Issue: Lexington Parker Capital Co. LLC, March 9, 2021
• New Issue: Concord Minutemen Capital CO. LLC, Jan. 28, 2021
• New Issue: Aquitaine Funding Co. LLC, Nov. 21, 2020
• New Issue: Legacy Capital CO. LLC, Nov. 18, 2020
• Transaction Update: Mackinac Funding Co. LLC, Nov. 10, 2020
• New Issue: Alinghi Funding Co. LLC, Nov. 6, 2020
• 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

• U.S. Auto Loan ABS Tracker: February 2021 Performance, April 13, 2021
• Economic Research: U.S. Markets See Inflationary Ghosts; Macroeconomic Signs Disagree, April 12, 2021
• Credit FAQ: How S&P Global Ratings Thinks About LIBOR Risks In U.S. Public Finance, April 7, 2021
• SF Credit Brief: U.S. SF New Issuance Was $63 Billion In March 2021, $156 Billion YTD, And Up 22% Year Over Year, April 1, 2021
• U.S. Credit Card Quality Index: Monthly Performance – February 2021, April 1, 2021
• ESG Industry Report Cards For Structured Finance Published, March 31, 2021
• Credit Conditions Europe Q2 2021: New Horizons, Old Risks, March 30, 2021
• Credit Conditions North America Q2 2021: As Outlook Brightens, Risks Remain, March 30, 2021
• U.S. Auto And Equipment ABS New Issuance Spreads Reach Pre-Pandemic Lows, Signaling Lower Risk Premium, March 25, 2021
• The ESG Pulse: Texas Storm Highlights Need For Preparedness, March 24, 2021
• How COVID-19 Is Affecting Bank Ratings: March 2021 Update, March 11, 2021
• EMEA Structured Finance: Surveillance Chart Book, March 10, 2021
• The ESG Pulse: 2020 Lookback, Feb. 15, 2021
• Large U.S. Banks' Earnings Should Improve In 2021 While Profitability Will Lag Pre-Pandemic Levels, Feb. 17, 2021
• Capital Resilience Alone Won’t Stabilize European Bank Ratings In 2021, Feb. 3, 2021
• European Structured Finance Outlook 2021: In Short Supply, Jan. 20, 2021
• Global Structured Finance 2021 Outlook: Market Resilience Could Bring Over $1 Trillion In New Issuance, Jan. 8, 2021
• S&P Global Ratings Definitions, Jan. 5, 2021
• U.S. And Canada Structured Finance Surveillance Chart Book, Dec. 17, 2020
• Inside Global ABCP: Issuance Growth Tempered As Economic Recovery Takes Shape, Oct. 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/_assets/documents/ratings/excel/inside-global-abcp-appendix_december-2020_v1-1-.xls