Quick introduction to ABCP
Here is the definition of ABCP based on The Fundamentals of Asset-Backed Commercial Papers, written by Swasi Bate, Stephany Bushweller, Everett Rutan from Moody’s.
Asset-backed Commercial Paper (ABCP) is a form of senior secured, short-term borrowing. By contrast, corporate Commercial Paper is senior unsecured short-term corporate debt.
Another point is that Asset-backed Commercial Paper programs offer low-cost financing to companies that could not otherwise directly borrow in the Commercial Paper markets.
An ABCP program, also called conduit, is a special purpose vehicle (SPV). It is established to fund a portfolio of assets through the issuance of Commercial Paper.
An Administrator is responsible for the overall activities of the conduit: recommending assets, arranging for purchase, issuing and repaying ABCP as needed, monitoring and servicing the assets and so forth.
The Process
An originator or Seller of the assets sells them to a special purpose vehicle in a true sale. In some cases, conduits fund the purchase of rated securities rather than receivables.
By the way, the purchasing SPV is funded by a loan from the ABCP conduit. Moreover, the amount of funding depends on the amount of “good”—non-defaulted, non-delinquent—assets available. It is usually financed at a haircut or percentage of face value to provide credit enhancement.
Context
The European Parliament voted on 12th December 2017 the “Securitisation Regulation”, which entered into force on 1st January 2019. This regulation is currently applied to the Programs following the issuance of any Notes including Asset-Backed Commercial Papers.
In fact, this Securitisation Regulation sets out new disclosure and reporting requirements. They respect the originator, the sponsor and the securitisation special purpose entity of a securitisation.
And they must designate amongst themselves one entity to fulfil these obligations. Usually, the sponsor is designated as the responsible entity for fulfilling the information requirements pursuant.
This new regulation, which standardizes the information to be sent and imposes increased requirements for exchange and versioning, is prompting ABCP players to optimize their processes. It is also accelerating the need for more global digitalization. This is a step long-demanded by Commercial Paper markets, and one we at Onbrane are capable of making.
What we already offer on Onbrane platform for ABCP market players
The issuers/dealers/brokers/investors can already connect to Onbrane and negotiate different Asset-Backed Commercial Papers.
These include French (NeuCP/NeuMTN) as well as European (ECP) and US (USCP) ABCPs. By the way, the negotiation and issuance is not different between a classic Commercial Paper and an asset-backed Commercial Paper.
Only the regulation for the pretrade step differs. This is because the regulation on Securitization is more complex.
That’s why ABCP market players must first validate and send all the required documents to the counterparties with whom they are negotiating outside the Onbrane platform.
Link with the community
I had the chance to meet almost all the French ABCP treasury desks and discover their vision of ABCP future.
The idea of building this ABCP module came from a key market player and has been commended by all the others. The module was then built and shaped with their feedback, in order to precisely deliver the tool that this market needs.
Pain points of the market
As a result of our discussions with the ABCP players, we noticed two problems in this specific market:
Problem with established counterparties:
As I mentioned before, the negotiation and issuance of ABCP is in every way similar to a traditional CP. The issuers express their needs, by creating a curve with desired characteristics (a maturity, a rate, an amount), under which they wish to issue Commercial Paper.
This need is then sent to their counterparties, which begins the negotiation process. Once the buyer’s and borrower’s interests are aligned, the deal is reached and the security is created.
The difference lies only in the pre-trade process, which is really cumbersome for ABCP market players.
As I said before, following the new Regulations in the EU and US, a set of legal documentation is necessary for upstream dealers/brokers/investors to be able to start negotiating ABCP (contracts relating to the underlying assets, contracts between the vehicle and its sponsoring bank, etc.).
This documentation is subject to change over time. Sending documents to each of the counterparties by e-mail can be a source of error, omission and redundancy.
In addition, the explanation of the evolution of this documentation (rating, etc.) also leads to repetition and heaviness in the process.
Problem to enlarge the pool of liquidity:
The ABCP issuers we met are happy with their liquidity and the placement agents they work with (often their sponsoring bank + US banks). Their ECP and USCP programs meet buyers’ interests quite easily and the liquidity.
Although it can always be improved, it is satisfactory as it is today.
On the other hand, French issuers all agree that it is difficult to find French investors for ABCP. As it is a lesser known product, it is difficult for French investors to analyze. Because of this, a few asset-backed NEUCPs are issued and they are also often overpriced.
The cash desks of these issuers and their dealers on NEUCP spend a lot of time explaining their products. Due diligence and properly informing potential new French investors to enter this market is also time-consuming.
Because of all the points mentioned before, this work is long and one-sided, but essential. The objective is to broaden the number of ABCP investors in general and AB NEUCP in particular.
Accordingly, this would allow such investors to have a stronger resilience to market events, thanks to a better market depth. It would also give investors the opportunity to diversify their investments.
Short-term solution
We have come up with a unique solution to address both of the above-stated problems. It’s a new module which will act as a depository for specific documentation exchange, Q&A and product marketing.
The negotiation & issuance of ABCP will continue there.
With the simplicity of negotiation trade flow that you already know, and the quality of the post-trade we ensure.
On top of that, there will be a new page for all issuers/dealers/brokers/investors called “Asset-Backed Information”. Here the issuers can upload all their documentation relative to their ABCP Program.
This information can be available for the counterparties and/or Onbrane platform users (Based on your privacy settings).
With each change of documents, new versioning or new ratings – all the counterparties will be notified at once. Moreover, a module to add comments will be set. Q&A could start in bilateral, between the issuer and one of their intermediaries for example.
And all of the information, interactions and discussions will be saved and can be downloaded by each user for compliance.
Furthermore, intermediaries can also make comments on issuers’ documents for their investors. And they can help them analyze and price these products.
In addition, new investors can see the ABCP issuers and ask questions about their program. This can be done directly or via their intermediaries.
Documentation, information and analysis will be facilitated, and potential investors will be interested to enter the market!
This ABCP module therefore responds to the two major pain points identified for the ABCP market. It facilitates pre-trade processes and enlarges the pool of investors (starting with the French investors) in the ABCP market.
This module is under development and will be available at the beginning of 2021!
Long term solution
In the long term, there is a real desire to facilitate ABCP issuances which will require standardization of the information exchanged in pretrade. The strengthening of the legal framework also helps us define mandatory fields and blocks of information needed.
The final goal is therefore to change the habits where each ABCP actor sends necessary information bilaterally, in a format of their own (a big contract that mixes everything, full of small contracts that separate everything…).
All of this in a uniform and standardized module that will simplify this exchange of information, but also its understanding by the investors in front.
The construction of standardization will be done with and for the ABCP players. It will require reflection and a moment of adoption with and from the stakeholders, but the gain in clarity, security and liquidity will be beneficial for all.
