- While securitized assets are sensitive to the macroeconomic stress induced by COVID-19, the credit quality of U.S. ABCP issuance remains stable.
- From the total outstanding 48 ABCP programs, 85 % are fully supported by liquidity, while the remaining 15% are well-diversified partially supported assets, with the largest sector being autos at 7.55%, including subprime (1.5%).
- Overall exposure in the ABCP programs to subprime autos, which may have a greater negative performance impact and may be at greatest risk in the non-investment-grade ABS classes, is less than 2%, with enhancement commensurate at 'A' level or higher.
- Banks and non-bank institutions providing liquidity to U.S. ABCP programs are diversified and highly rated entities, and a one-notch movement of the long-term rating may not necessarily lead to a change in the short-term rating based on our linking methodology.
While the COVID-19 pandemic is having a broad impact upon global structured finance markets, the magnitude of the impact varies by industry, geography, and rating. For U.S. asset-backed commercial paper (ABCP) sector, the credit quality of the issuances remains stable, based on the percentage of fully supported transactions; structured finance asset sector exposure for the partially supported transactions; high investment-grade ratings on banks and non-bank institutions providing liquidity support to the U.S. ABCP programs; and extensive experience of bank and non-bank sponsors.
The U.S. government's $2.3 trillion stimulus package and the Fed's establishment of various facilities (such as the Commercial Paper Funding Facility (CPFF), Prime Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, and the new Repo facility) will continue to have a favorable impact on liquidity and credit in the U.S. ABCP markets. This was reflected by tightening spreads between the end of March/early April and the first week of March. For example, in the case of overnight paper, spreads tightened by approximately 100–150 basis points (bps) during this period, with tenors lengthening to weekly or one–three months versus the majority of paper rolling overnight during the same period. In comparison, spreads for highly rated ABCP are typically close to LIBOR (ranging between -5 bps and +10 bps).
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The utilization of ABCP facilities increased during March due to a relatively inaccessible term market, and we continue to see new seller activity in the ABCP programs, although at a slower pace. Per the Fed data, ABCP outstanding increased to $271.0 billion on April 1 from $250.8 billion at the end of February. While most sponsors were able to issue ABCP during March--albeit at higher pricing and shorter tenors--there were some draws under liquidity facilities. In addition, most sponsors indicated the high pricing of the CPFF. On March 27, 2020, S&P Global Ratings rated GTA Funding LLC, a new ABCP program with multiple 'A-1+' issuances (see "GTA Funding LLC," published on RatingsDirect).
COVID-19 Effect On U.S. Structured Finance Bears Watching
Asset sensitivity of structured finance sectors to COVID-19
While the overall credit outlooks for structured finance in light of COVID-19 have turned somewhat cautious, we note that the ultimate impact is still uncertain, and likely to affect some sectors more than the others. Risk of payment holidays for consumer, mortgage, and small to medium enterprise debt could interrupt cash flow, but structural mechanisms should insulate investors from shortfalls unless the interruptions endure. Areas of greater focus include collateralized loan obligations (CLO), commercial mortgage backed securities (CMBS) with high exposure to retail or hotels, U.S. subprime auto asset-backed securities (ABS), U.S. non-QM RMBS, aircraft ABS, small business or SME related ABS, dealer floorplan ABS, corporate securitizations and certain other esoteric asset classes.
|COVID-19 Impact On North American Structured Finance|
|12-month outlook (Q1 2020)|
|Region and sector||2020 collateral performance trends||2020 rating performance trends|
|U.S. RMBS||Somewhat weaker||Stable to negative|
|U.S. ABS||Somewhat weaker||Stable to negative|
|U.S. CMBS||Somewhat weaker||Stable to negative|
|U.S. ABCP||Somewhat weaker||Stable|
|RMBS--Residential mortgage-backed securities. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. CLO--Collateralized loan obligationi. ABCP--Asset-backed commercial paper. Source: S&P Global Ratings.|
Asset sensitivity in U.S. ABCP programs to structured finance sectors
For U.S. ABCP, sector fundamentals and rating trends are stable, while the collateral performance is expected to be somewhat weaker (see table 1) based on macroeconomic factors. Our stable view is based on the percentage of fully supported transactions, asset sector exposure for the partially supported transactions, high investment-grade ratings on banks and non-bank institutions providing liquidity support to the U.S. ABCP programs, and extensive experience of bank and non-bank sponsors.
Weakening asset performance may result, in part, from changing macroeconomic factors, such as a decline in GDP and an increase in unemployment, which ultimately affects some obligors' ability to satisfy payment obligations due to reduced income. The actual impact will ultimately vary for each sector and between originators. The impact will also vary between individual transactions, reflecting the pool-specific asset quality and structural features. Furthermore, there may be operational challenges due to servicing assets and collection processes on the securitized assets.
Table 2 shows that of the 48 ABCP programs rated by S&P Global Ratings as of Nov. 30, 2019, net investment was $221.6 billion. Of this amount, $188.4 billion, or 85 % of ABCP, is fully supported by liquidity, either in the form of fully supported transactions funded in the partially supported programs, or issued by fully supported programs. Table 2 highlights the sector exposure for U.S. ABCP programs.
|ABCP Exposure (As Of November 2019)|
|Partially supported assets||Total commitment (mil. $)||(%)||Net investment (mil. $)||(%)|
|Prime auto loans||12,417.77||4.29||8,362.85||3.77|
|Non-prime auto loans||15.70||0.01||15.70||0.01|
|Subprime auto loans||5,226.70||1.81||3,302.75||1.49|
|Prime/non-prime/subprime auto loans(i)||2,400.00||0.83||1,435.53||0.65|
|Private student loans||3,554.38||1.23||3,123.23||1.41|
|FFELP student loans||2,462.73||0.85||1,809.69||0.82|
|Equipment and commercial other(ii)||4,295.00||1.49||2,424.80||1.09|
|Mobile handset loans||1,150.68||0.40||1,150.68||0.52|
|Unsecured consumer loans||1,463.36||0.51||613.36||0.28|
|Fully supported in partially supported conduits||19,092.03||6.60||33,160.21||14.96|
|Fully supported conduits||214,701.71||74.25||155,269.15||70.07|
|(i)Prime/non-prime/subprime category is used for sellers where borrowing base allows for all three asset classes. (ii)Commercial other includes commercial fleet leases, future flow, insurance premium, and manufactured housing. (iii)Fully supported transactions (where exposure is only directly related to bank counterparty) is the largest class of the entire portfolio. ABCP--Asset-backed commercial paper.|
Partially supported assets make up $33.2 billion, or 15% of total ABCP outstanding. Partially supported assets are well diversified, with the three-largest sectors being autos at 7.55%, including subprime autos at 1.5%; student loans at 2.2%; and credit cards at 1.4%. While the collateral performance trends are somewhat weaker for U.S. ABS, we currently expect stable rating trends in each of these sectors, with the exception of subprime auto loans. Subprime autos may have a greater negative performance impact and may have the greatest risk in the non-investment-grade ABS classes; however, the overall exposure in the ABCP programs is less than 2%. In addition, the enhancement is commensurate with an 'A' or higher rating (see "The Potential Effects of COVID-19 on U.S. Auto Loan ABS," published March 26, 2020, and "Assessing The Credit Effects of COVID-19 On U.S. And Canadian Credit Card ABS," published March 25, 2020).
While some transactions in the trade receivables and consumer "other" sector may be vulnerable to the economic downturn, given the relatively low exposure levels and loss coverage multiples, it is currently not an area of concern. Moreover, the structured finance sectors we deem to have a greater focus on due to COVID-19 are either not funded in U.S. ABCP programs, or are fully supported by liquidity.
The weighted average loss coverage multiple provided by credit enhancement as of November 2019 shows ample coverage for various partially supported assets (see table 3). The loss coverage multiple is even higher if we consider the 8%–10% of fungible program-wide credit enhancement for the partially supported programs. The losses we assumed are based on the loss horizon considered under the respective liquidity agreements. Our base-case loss assumptions for all the partially supported transactions are above the current loss performance and reflect our view of expected performance during multiple economic scenarios specific to the ABS sector. We continue to surveil monthly performance on all of the partially supported transactions against our base-case loss assumptions and will continue to monitor any weakness in the collateral over time.
|Weighted Average Loss Coverage Multiple Provided By Credit Enhancement (As Of November 2019)|
|Asset||Actual CE to loss horizon losses(i)|
|Dealer floorplan (%)(iii)||29.28|
|Note: all multiples are weighted average based on net investments of each transaction. (i)Losses assumed as $0 when net investment is $0; loss horizon consistent with funding under respective liquidity agreements. (ii)Commercial other includes fleet leases, future flows, and insurance premiums finance assets. (iii)Dealer floorplan has net losses of $0; percentage included is the weighted average total credit enhancement available. CE--Credit enhancement.|
COVID-19's Effect On Financial Institution Ratings A More Important Factor In U.S. ABCP
The second, and more important, factor in determining the COVID-19 impact on U.S. ABCP is the ratings on financial institutions, which are the primary source of liquidity backing the ABCP programs. The bank sponsors and non-bank institutions providing liquidity are highly rated entities, and a one-notch movement on the long-term rating may not necessarily lead to a change in the short-term rating based on our linking methodology (see "Methodology For Linking Long-Term And Short-Term Ratings," April 7, 2017).
Banks providing liquidity to ABCP programs rated by S&P Global Ratings are diversified geographically, with the top three regions being North America (U.S. and Canada), Europe, and Asia (Japan) (see table 4).
|Banks Providing Liquidity To ABCP Programs|
|Region||% of net investments|
|Non-financial institutions (Germany and U.S.)||8.7|
|ABCP--Asset-backed commercial paper.|
For financial institutions in North America, the impact from COVID-19 will depend in large part on the duration and severity of the pandemic, as well as how long the economy remains in lockdown mode (see "Credit Conditions North America: Unprecedented Uncertainty Slams Credit," published March 31, 2020). We believe the extraordinary actions from the Federal Reserve and the support provided from the federal government to individuals and businesses help support banks' liquidity, asset quality, and earnings, and banks enter this period from a position of strength. However, we still expect them to see sharp rises in loan modifications and nonperforming assets, lower earnings, and other challenges.
For Europe's diverse financial markets, the banks' overall balance-sheet strength has been a key support of creditworthiness in the midst of profitability challenges. In the near term, tighter funding conditions are unlikely to cause widespread problems for banks we rate—markets remain open for strong names, and central banks have expanded their term lending facilities and eased the related terms. Most of our outlooks on the 100-largest European banks are stable, but the outlook bias is now clearly negative and the coronavirus' escalation to a pandemic has already led our economists to make several negative revisions to their economic forecasts for 2020 and 2021. For now, we think most banks can handle the shock in 2020, assuming a temporary economic contraction with a U-shaped recovery from the third quarter, and governments' action plans to support borrowers (see "COVID-19 Countermeasures May Contain Damage To Europe's Financial Institutions For Now," published March 13, 2020), but risks are heavily slanted to the downside and the outlook bias could well become more negative.
As with other central banks, the bank of Japan has enhanced its stimulus package to bring stability to its markets. While the current BICRA is stable for Japan, persistent low profitability could weaken the stability of Japan's banking system (see chart 1) (see "Japan Banking Outlook 2020: Buckle Down For Major Turbulence," published Jan. 21, 2020, and "For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs," published April 5, 2020).
|U.S. ABCP Programs (As Of April 2020)|
|Sponsor/administrator||Program||Program rating||LF provider/eligibility criteria||LF provider rating||Conduit type||Nature of LF support|
|Royal Bank of Canada||Old Line Funding LLC||A-1+||Royal Bank of Canada||AA-/Stable/A-1+||Multi-seller||Partial|
|Royal Bank of Canada||Thunder Bay Funding LLC||A-1+||Royal Bank of Canada||AA-/Stable/A-1+||Multi-seller||Partial|
|Royal Bank of Canada||Bedford Row Funding Corp.||A-1+||Royal Bank of Canada||AA-/Stable/A-1+||Single-seller||Full|
|FMS Wertmanagement Anstalt des oeffentlichen Rechts||Kells Funding LLC||A-1+||FMS Wertmanagement Anstalt des oeffentlichen Rechts||AAA/Stable/A-1+||Single-seller||Full|
|Berkadia Commercial Mortgage LLC||Welsh Road Funding LLC||A-1+||Berkshire Hathaway Inc.||AA/Stable/A-1+||Single-seller||Full|
|DZ BANK AG Deutsche Zentral-Genossenschaftsbank||Autobahn Funding Co. LLC||A-1+||DZ Bank AG||AA-/Negative/A-1+||Multi-seller||Full|
|The Toronto-Dominion Bank||GTA Funding LLC(i)||A-1+||The Toronto-Dominion Bank||AA-/Stable/A-1+||Multi-seller||Full|
|JPMorgan Chase Bank N.A.||Chariot Funding LLC||A-1||JPMorgan Chase Bank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|JPMorgan Chase Bank N.A.||Jupiter Securitization Co. LLC||A-1||JPMorgan Chase Bank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|Citibank N.A.||CAFCO LLC||A-1||Citibank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|Citibank N.A.||CRC Funding LLC||A-1||Citibank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|Citibank N.A.||Charta LLC||A-1||Citibank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|Citibank N.A.||Ciesco LLC||A-1||Citibank N.A.||A+/Stable/A-1||Multi-seller||Partial|
|MUFG Bank Ltd.||Victory Receivables Corp.||A-1||MUFG Bank Ltd.||A/Positive/A-1||Multi-seller||Full|
|MUFG Bank Ltd.||Gotham Funding Corp.||A-1||MUFG Bank Ltd.||A/Positive/A-1||Multi-seller||Full|
|JPMorgan Chase Bank N.A.||Collateralized Commercial Paper Co. LLC||A-1||JPMorgan Securities LLC||A+/Stable/A-1||Single-seller||Full|
|JPMorgan Chase Bank N.A.||Collateralized Commercial Paper II Co. LLC||A-1||JPMorgan Securities LLC||A+/Stable/A-1||Single-seller||Full|
|JPMorgan Chase Bank N.A.||Collateralized Commercial Paper III Co. LLC||A-1||JPMorgan Securities PLC||A+/Stable/A-1||Single-seller||Full|
|JPMorgan Chase Bank N.A.||Collateralized Commercial Paper Flex Co. LLC||A-1||JPMorgan Securities LLC||A+/Stable/A-1||Single-seller||Full|
|JPMorgan Chase Bank N.A.||Collateralized Commercial Paper V Co. LLC||A-1||JPMorgan Securities LLC||A+/Stable/A-1||Single-seller||Full|
|Guggenheim Treasury Services, LLC||Bennington Stark Capital Co. LLC||A-1||Societe Generale||A/Positive/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Cedar Springs Capital Co. LLC||A-1||1) Credit Suisse AG; 2) Natixis S.A.; 3) UBS AG London Branch||1) A+/Stable/A-1; 2) A+/Stable/A-1; 3) A+/Stable/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Concord Minutemen Capital Co. LLC||A-1||1) BNP Paribas; 2) Credit Suisse AG; 3) Deutsche Bank Securities Inc.; 4) UBS AG London Branch||1) A+/Stable/A-1, A+/Stable/A-1; 2) BBB+/Stable/A-2; 3) A+/Stable/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Crown Point Capital Co. LLC||A-1||Credit Suisse AG||A+/Stable/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Great Bridge Capital Co. LLC||A-1||Standard Chartered Bank||A/Stable/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Legacy Capital Co. LLC||A-1||Macquarie Bank Ltd.||A/Positive/A-1||Multi-seller||Full|
|Guggenheim Treasury Services, LLC||Lexington Parker Capital Co. LLC||A-1||Natixis S.A.||A+/Stable/A-1||Multi-seller||Full|
|Guggenheim Treasury Services LLC||Ridgefield Funding Co. LLC (Series A)||A-1||BNP Paribas||A+/Stable/A-1||Multi-seller||Full|
|Credit Agricole Corporate and Investment Bank||La Fayette Asset Securitization LLC||A-1||Credit Agricole CIB||A+/Stable/A-1||Multi-seller||Full|
|Credit Agricole Corporate and Investment Bank||Atlantic Asset Securitization LLC||A-1||Credit Agricole CIB||A+/Stable/A-1||Multi-seller||Full|
|Barclays Bank PLC||Salisbury Receivables Co. LLC||A-1||Barclays Bank PLC||A/Stable/A-1||Multi-seller||Full|
|Barclays Bank PLC||Sheffield Receivables Co. LLC||A-1||Barclays Bank PLC||A/Stable/A-1||Multi-seller||Full|
|Barclays Bank PLC||Sunderland Receivables S.A.||A-1||Barclays Bank PLC||A/Stable/A-1||Multi-seller||Full|
|Societe Generale||Barton Capital LLC||A-1||Societe Generale||A/Stable/A-1||Multi-seller||Full|
|Sumitomo Mitsui Banking Corp.||Manhattan Asset Funding Co. LLC||A-1||SMBC||A/Positive/A-1||Multi-seller||Full|
|Sumitomo Mitsui Trust Bank, Ltd||Lime Funding LLC||A-1||SMTB||A/Positive/A-1||Multi-seller||Full|
|Credit Suisse AG||Alpine Securitization Ltd.||A-1||Credit Suisse AG, Cayman Islands Branch||A+/Stable/A-1||Multi-seller||Full|
|Bank of Nova Scotia||Liberty Street Funding LLC||A-1||Bank of Nova Scotia||A+/Stable/A-1||Multi-seller||Full|
|BNP Paribas||Starbird Funding Corp.||A-1||BNP Paribas||A+/Stable/A-1||Multi-seller||Full|
|Bank of Montreal||Fairway Finance Co. LLC||A-1||Bank of Montreal||A+/Stable/A-1||Multi-seller||Full|
|Natixis Financial Products Inc.||Versailles Assets LLC||A-1||Natixis Financial Products LLC||A+/Stable/A-1||Multi-seller||Full|
|Natixis Financial Products Inc.||Versailles Commercial Paper LLC||A-1||Natixis Financial Products LLC||A+/Stable/A-1||Multi-seller||Full|
|Cantor Fitzgerald, L.P.||Institutional Secured Funding (Jersey) Ltd.||A-1||1) BNP Paribas; 2) Macquarie Bank Ltd.; 3) Societe Generale||1) A+/Stable/A-1; 2) A/Positive/A-1; 3) A/Positive/A-1||Multi-seller||Full|
|21 Gates Management LLC||MountCliff Funding LLC||A-1||1) BNP Paribas; 2) Credit Suisse AG; 3) Societe Generale; 4) Natixis Financial Products LLC||1) A+/Stable/A-1; 2) A+/Stable/A-1; 3) A/Positive/A-1; 4) A+/Stable/A-1||Multi-seller||Full|
|Cooperative Association of Tractor Dealers Inc.||DCAT LLC||A-1||Caterpillar Financial Services Corp.||A/Stable/A-1||Single-seller||Full|
|Bunge Ltd.||Bunge Asset Funding Corp.||A-1||1) Wells Fargo Bank, National Association; 2) BMO Harris Bank, N.A.; 3) JPMorgan Chase Bank, N.A., 4) Citibank N.A.; 5) BNP Paribas; 6) Bank of Tokyo-Mitsubishi UFJ Ltd., 7) Goldman Sachs Bank USA; 8) Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland); 9) Credit Suisse AG; 10) Mizuho Bank Ltd.; 11) PNC Bank National Association; 12)Standard Chartered Bank; 13) U.S. Bank National Association; 14) Credit Agricole CIB; 15) ING Bank N.V.; 16) Sumitomo Mitsui Banking Corp.; 17) Bank of Nova Scotia||1) A+/Stable/A-1; 2) A+/Stable/A-1; 3) A+/Stable/A-1; 4) A+/Stable/A-1; 5) A+/Stable/A-1; 6) A/Positive/A-1; 7) A+/Stable/A-1; 8) A+/Stable/A-1; 9) A+/Stable/A-1; 10) A/Positive/A-1; 11) A/Stable/A-1; 12) A/Stable/A-1; 13) AA-/Stable/A-1+; 14) A+/Stable/A-1; 15) A+/Stable/A-1; 16) A/Positive/A-1; 17) A+/Stable/A-1||Single-seller||Full|
|Nearwater Liquid Markets, LLC||Columbia Funding Co. LLC||A-1||1) J.P. Morgan Securities LLC; 2) Counterparty with a minimum 'A/A-1' rating||1) A+/Stable/A-1; 2) Counterparty with a minimum 'A/A-1' rating||Single-seller||Full|
|Nearwater Liquid Markets LLC||Mackinac Funding Co. LLC(i)||A-1||1) BNP Paribas; 2) Counterparty with a minimum A/A-1 rating (currently Soc Gen & Barclays)||Single-seller||Full|
|Guggenheim Treasury Services LLC||White Plains Capital Co. LLC||A-2||Nomura Securities Co. Ltd.||A-/Stable/A-2||Multi-seller||Full|
|(i)Rated in 2020. LF--Liquidity facility.|
- For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs, April 5, 2020
- Credit Conditions North America: Unprecedented Uncertainty Slams Credit, March 31, 2020
- It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain, March 27, 2020
- GTA Funding LLC, March 27, 2020
- The Potential Effects Of COVID-19 On U.S. Auto Loan ABS, March 26, 2020
- Assessing The Credit Effects of COVID-19 On U.S. And Canadian Credit Card ABS, March 25, 2020
- Assessing The Coronavirus-Related Damage To The Global Economy And Credit Quality, March 24, 2020
- Stress Scenarios Show How U.S. Bank Ratings Could Change Amid Pandemic-Induced Financial Uncertainty, March 24, 2020
- The Global Recession Is Likely To Push The U.S. Default Rate To 10%, March 19, 2020
- The Fed's Crisis Actions Will Further Bolster Liquidity For U.S. Banks, But Earnings And Asset Quality Are Set To Worsen Substantially, March 18, 2020
- COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
- COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
- COVID-19 Countermeasures May Contain Damage To Europe's Financial Institutions For Now, March 13, 2020
- Japan Banking Outlook 2020: Buckle Down For Major Turbulence, Jan. 21, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Radhika Kalra, New York (1) 212-438-2143;|
|Research Assistant:||Derek K Yau, Centennial|
|Analytical Manager:||Cathy C de la Torre, New York +1 (212) 438-0502;|
|Research Contact:||Tom Schopflocher, New York (1) 212-438-6722;|
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