S&P Global Ratings expects asset-backed commercial paper (ABCP) outstanding in the U.S. to remain around our projected levels of approximately $270-$280 billion by year-end 2022. We expect persistent rate hikes to support increased ABCP issuance as companies shift to borrowing at attractive short-term rates. At the same time, the weakening economy could keep issuance growth muted.

In Europe, the Middle East, and Africa (EMEA), total ABCP outstanding declined approximately 2.2% between December 2021 and June 2022. Although committed funding amounts also declined by similar levels, utilization rates improved slightly. Overall, while ABCP volumes remain above the levels seen prior to 2021, we expect issuances to moderately decline should current macroeconomic conditions persist or worsen.

In Japan, performance trends remained largely stable and unchanged from 2021.

Globally, the top 10 sponsors accounted for approximately 72.3% of all S&P Global Ratings-rated ABCP outstanding in the U.S. and EMEA as of June 2022.

Credit-Related Sensitivity For ABCP Remains Secondary

Until now, the Russia-Ukraine conflict has had a limited direct effect on our ratings on ABCP transactions.

For fully supported ABCP programs, we consider any credit-related sensitivity to be secondary. The ratings on fully supported ABCP programs are weak-linked to the ratings on the liquidity facility or support provider, and rating actions on the ABCP generally stem from rating changes on these entities (see the Appendix for more information). 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.

For banks globally, considering the more difficult economic environment we see in our base case, we raised our forecast of credit losses this year by about 10.0% over our earlier forecasts in February 2022. Globally, while banks entered 2022 with broadly healthy capital and solid balance sheets, the more difficult operating environment ahead could cloud future progress. Currently our net outlook bias for banks was 6.0% at the end of August 2022, up from a net negative 1.0% prior to the outbreak of COVID-19 in early 2020.

Based on this, we currently expect our ratings on fully supported ABCP conduits in EMEA to not be affected over the next six months (see the Appendix). However, we consider that about 13.2% of fully supported conduits in the U.S. could be affected based on the issuer credit rating (ICR) on the support provider (see the Appendix). In view of the deteriorating macroeconomic conditions, we will continue to monitor for any support-provider rating changes that could affect ratings on fully supported ABCP.

For partially supported ABCP, we also consider asset performance in our analysis. For unsecured consumer loans, we consider the collateral performance outlook somewhat weaker, and ratings trends stable to negative. For prime and subprime auto loans, credit cards, and Federal Family Loan Education Loan Program (FFELP) student loans, we expect somewhat weaker collateral performance. At the same time, we expect rating trends to be stable to positive for prime and subprime auto loans, and stable for credit cards and FFELP student loans. For all other ABS collateral types, we expect both collateral performance and rating trends to be 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. Further, our view considers the low exposure, ample weighted-average loss coverage multiples from credit enhancement for various partially supported assets, and the availability of 8.0%-10.0% 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. We will also continue to monitor the monthly performance on all of the partially supported transactions against our base-case loss assumptions, including any weakness in the collateral performance over time.

In the first half of 2022, we rated one new program in EMEA and an additional issuance from an existing program in the U.S. We also discontinued our ratings on one program in EMEA, following the withdrawal of an ICR of the support provider. We continue to monitor any deterioration in support provider ratings and collateral performance over time.

U.S.: Weak Economic Conditions Could Mute Issuance Growth

The current level of U.S. ABCP outstanding rose approximately 8.0% to be in the mid-$280 billion range from approximately $265 billion as of April 2022, as the Federal Reserve (Fed) embarked on an aggressive monetary policy tightening path, beginning in March 2022 with its initial 25 basis points (bps) rate increase. The Fed's continued rate increases since then are aimed at reducing inflation and will likely persist until the federal funds rate target reaches 4.00%-4.25% by early 2023. This supports increased ABCP issuance as companies shift to borrow funds at more attractive short-term rates rather than via long-term corporate bond issuances and bank loans. However, issuance growth could be somewhat muted as the momentum in the economy weakens. Our economists expect positive but decelerated real GDP growth of 1.6% this year and a mere 0.2% in 2023, with a greater likelihood of a shallow, technical recession in the first half of 2023.

As cumulative rate hikes take hold, banks are still operating with sound capital, stable funding, and good asset quality metrics, and remain mostly on stable rating outlooks. Also, rising rates have boosted net interest income for banks (allowing for the absorption of increasing provisions for credit losses, tepid fee income, and rising expenses) helped by loan growth, even while deposits shrink due in part to quantitative tightening. With lower deposit growth amid an increasing rate environment, banks are more likely to resort to non-deposit funding such as ABCP. That said, we have seen a few newly launched programs in the U.S., additional client proposals currently under review, and new seller activity slightly outpacing the wind-down of previously funded transactions. All of this supports our view that overall ABCP outstanding issuance will remain within our projected levels of approximately $270 billion-$280 billion by year-end 2022.

Chart 1

In the last six months, our ratings on ABCP outstanding remained stable. Since April 2022, we have rated issuances from programs (see the Rating Actions section), including the following:

• Armada Funding Co. LLC (sponsored by Nearwater Capital) is a new, fully supported conduit that will issue U.S. dollar-denominated class B standard, callable, puttable, and puttable/callable ABCP notes to fund financial securities or financial assets supported by liquidity agreements in the form of asset purchase agreements, loan agreements, global or master securities lending agreements, global or master repurchase agreements, and total return swaps.
• GIFLS Capital Co. LLC (managed by Guggenheim Treasury Services LLC) is a new, fully supported conduit that will issue U.S. dollar-denominated standard, callable, puttable, and puttable/callable ABCP certificates to fund financial assets including equities in the form of asset purchase agreements, loan agreements, global or master securities lending agreements, global or master repurchase agreements, and total return swaps.

We did not withdraw or lower any ratings on ABCP issued by conduits over the past six months.

Key trends in program composition

As of June 2022, U.S. dollar-denominated issuances accounted for the majority of the ABCP outstanding in the U.S., at almost 98.0%, while the rest of the issuances were denominated in euros and British pound sterling (see chart 2).

As of June 30, 2022, three sponsors (Citibank, JPMorgan, and Royal Bank of Canada) represent the nine partially supported programs, totaling $52.7 billion of ABCP outstanding, which make up 23.0% of the total U.S. ABCP that we rate (see Appendix). As of Oct. 25, 2022, the remaining 55 programs in the U.S. (an increase of two programs since June 30, 2022), are fully supported and total approximately $174.2 billion, or 77.0% of the total U.S. ABCP that we rate (see Appendix).

As of June 30, 2022, traditional assets (such as auto loans and leases, credit cards, student loans, consumer loans, and equipment loans and leases) make up approximately 38.5% of the collateral in all conduits (see chart 3) and 76.0% of the collateral in partially supported programs (see Appendix).

Chart 2

Chart 3

EMEA: Market Uncertainties Slow Issuances In First-Half 2022

The total S&P Global Ratings-rated ABCP outstanding from conduits domiciled in EMEA decreased 2.2% to $115.3 billion as of June 2022 from December 2021. At the same time, volumes remain well-above levels prior to 2021. Overall, we expect issuance volumes to remain moderate or even decline slightly, considering the current macroeconomic conditions.

We rated and assigned 'A-1' to Chesham Finance Ltd.'s Segregated ABCP Program Series VIII in March 2022 (see "Chesham Finance Ltd./Chesham Finance LLC's Segregated ABCP Program Series VIII Assigned Rating," published March 1, 2022). We also withdrew our ratings on Opusalpha Funding Ltd. in July 2022 (see Related Research). Additionally, committed funding amounts on conduits that we currently rate decreased approximately 2.0% (see chart 4). At the same time, utilization rates improved slightly to 81.2% up from about 79.3% in 2021.

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.

In July 2022, we discontinued our ratings on Opusalpha Funding Ltd., since the short-term rating on the support provider, Landesbank Hessen-Thüringen Girozentrale, was withdrawn at the issuer's request. Other than these rating actions, the ratings on all other ABCP programs remained stable during the first six months of 2022. Based on our analysis, none of the conduits is currently vulnerable to a change in the credit rating on the support provider. However, we will continue to monitor any changes to the support provider ratings, considering the current macroeconomic conditions.

Key trends in program composition

More than 99.5% of the ABCP outstanding issued by European conduits are denominated in U.S. dollars, euros, and British pound sterling, and their share remains largely stable compared to December 2021 (see chart 5).

Chart 5

The share of single-seller programs increased to about 15.4% from 13.7% in 2021, due to slightly higher issuances from conduits backed by investment contracts. The proportion of issuances split by 'A-1+', 'A-1' and 'A-2' rated programs remained largely stable (see Appendix).

Asset investment declined in the first half of 2022

Total asset investments in EMEA fell 4.1% as of June 30, 2022, compared with 2021, with a decline in autos and trade receivables, although they continued to account for about half of the total asset investments(see chart 6). The share of investment contracts such as repurchase agreements, total return swaps, and securities lending agreements, which all have been increasing, remains at around a third of all investments, as of June 2022. Of all assets, approximately 84.0% remain domiciled across various countries in EMEA. Currently, none of the conduits that we rate have any asset investments in Russia or Ukraine.

Chart 6

Japan: Overall Market Activity Remains Stable

ABCP is a traditional form of securitization in Japan. Currently, there is one ABCP outstanding program, 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 remain 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 following their closures and upon the related requests of the transaction parties.

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 June 30, 2022, the top 10 sponsors globally are concentrated in the U.S. and EMEA. They formed approximately 71.7% of S&P Global Ratings-rated ABCP outstanding issuances in these two regions, up from 70.2% since December 2021. The top three sponsors hold approximately 33.0% of the total issuance volumes in the U.S. and EMEA, slightly lower than 33.5% in December 2021.

In the U.S, the top 10 sponsors, administrators, and managers accounted for 79.4% of the total ABCP outstanding as of June 30, 2022 (see Appendix). Three of the top 10 sponsors and administrators accounted for approximately 23.2% of the total ABCP outstanding in nine partially supported conduits as of June 2022 (see Appendix). The top 10 liquidity providers represent a combined commitment of approximately $206.3 billion, or 85.9%, of the $240.2 billion of support available for the U.S. ABCP that we rate.

In EMEA, the top 10 sponsors accounted for 92.2% of the total ABCP outstanding as of June 30, 2022, from 91.9% as of Dec. 31, 2021 (see Appendix). The top 10 liquidity providers represent a combined commitment of approximately $108.1 billion, or 76.7% of the $141 billion support available for the EMEA ABCP that we rate.

Chart 7

Appendix

The appendix tables are available here: https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/101568196

Resolution Counterparty Ratings Versus ICRs On Support Providers in ABCP

Typically, the applicable counterparty rating is either the ICR or the resolution counterparty rating (RCR), if relevant, depending on the support provider's obligation. 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.

Assessing Sensitivity of Rating On A Fully Supported Conduit

In Appendix 1a and 1b, to assess the sensitivity of the rating on a fully supported conduit to a change in the credit rating on the support provider, we considered the outlook and our mapping of long-term ratings to short-term ratings. For example, for an 'A-1 (sf)' 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- (sf)' corresponds to an 'A-2 (sf)' 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.

ESG Credit Indicators For ABCP Programs

Consistent with our Environmental, Social, and Governance (ESG) criteria, our issue credit ratings on structured finance transactions incorporate an analysis of ESG factors when, in our opinion, they could materially influence creditworthiness and therefore, affect the timely payment of interest or ultimate repayment of principal by the legal final maturity date.

For ABCP programs, we do not expect to publish separate ESG credit indicators, because the credit ratings on the liquidity facility or support providers are the primary driver of our credit rating analysis. Consequently, the influence of ESG factors in our credit rating analysis primarily depends on the influence of ESG factors on the underlying credit rating dependencies.

We reference the ESG credit indicator for each liquidity facility or support provider, where published, and have included this in the Appendix (refer to Appendix 1a and 1b) for each program we rate. For this purpose, to the extent a specific liquidity facility or support provider has not published an ESG credit indicator, we have disclosed the ESG credit indicator for the parent or super parent under the hierarchy of the liquidity facility or support provider, where available. ESG credit indicators relate to an entities' stand-alone analysis or, in the case of a parent company, the group credit profile. An entity's ESG credit indicator does not reflect the influence of ESG factors on the related parent. As such, the ESG credit indicator could diverge from that of its related parent where published (see "ESG Credit Indicator Definitions And Application," published Oct. 13, 2021).

ESG credit indicators do not affect existing credit ratings. Rather, they reflect the extent to which ESG factors influence our credit analysis. ESG credit indicators are not a sustainability rating or measure of how entities are positioned in terms of ESG performance. In our assessment of ESG credit indicators, we only consider exposure to ESG factors that could influence creditworthiness.

Rating Actions

• New Issue: GIFLS Capital Co. LLC, Oct. 14, 2022
• New Issue: Armada Funding Co. LLC, July 7, 2022
• Chesham Finance Ltd./Chesham Finance LLC's Segregated ABCP Program Series VIII Assigned Ratings, March 1, 2022

Related Research

• Global Credit Conditions Downside Scenario: Recession Risks Deepen, Oct. 12, 2022
• Global Credit Conditions Q4 2022: Darkening Horizons, Sept. 29, 2022
• Economic Research: U.S. Biweekly Economic Roundup: Retail Sales Stay Resilient Amid Elevated Inflation And Low Consumer Sentiment, Oct. 22, 2021
• EMEA Structured Finance Chart Book: October 2021, Oct. 22, 2021
• U.S. Auto Loan ABS Tracker: August 2021 Performance, Oct. 20, 2021
• North American Financial Institutions Monitor 4Q 2021: Riding The Economy's Tailwind And Aiming For A Smooth Landing, Oct. 20, 2021
• The Jury Is Out: Will European Banks Fly Or Flounder As Competition Increases?, Oct. 14, 2021
• SF Credit Brief: U.S. Structured Finance Issuance Totaled $78B In September; $549B For Year Up Over 62% From 2020, Oct. 4, 2021
• U.S. And Canada Structured Finance Chart Book, Sept. 29, 2021
• Global Credit Conditions Q4 2021: Supply Chain Strain, Inflation Pain, Sept. 29, 2021
• Top 100 Banks: Capital Ratios Show Resilience To The Pandemic, Sept. 28, 2021
• Credit FAQ: How Could Cyber Risks Affect Structured Finance Transactions?, Sept. 8, 2021
• U.S. Credit Card Quality Index: Monthly Performance – August 2021, Sept. 27, 2021
• Global Banking Country Outlook Midyear 2021: Tantalizing Signs of Stability, July 22, 2021
• Global Structured Finance Midyear Outlook 2021: Issuance Forecast Raised To $1.4 Trillion, July 20, 2021
• Global Structured Finance: Charting The Recovery From COVID-19, June 14, 2021
• Default, Transition, And Recovery: 2020 Annual Global Structured Finance Default And Rating Transition Study, May 13, 2021
• Inside Global ABCP: Economic Recovery To Underpin Modest Issuance And Stable Ratings, April 28, 2021
• ESG Industry Report Cards For Structured Finance Published, March 31, 2021
• The ESG Pulse: Texas Storm Highlights Need For Preparedness, March 24, 2021
• EMEA Structured Finance: Surveillance Chart Book, March 10, 2021
• The ESG Pulse: 2020 Lookback, Feb. 15, 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, Aug. 7, 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