On May 12, 2020, S&P Global Ratings analysts hosted a webinar that provided both an overview of asset-backed commercial paper (ABCP) markets and the state of global financial institutions. Other topics included the ratings impact of financial institutions upon ABCP, ABCP support programs, and ABCP as a funding source for term ABS. A replay of this webinar is available at https://event.on24.com/wcc/r/2303570/A82E49738F8D3002E76881E72664D0BD.

We received many interesting questions, some of which we answered during the webinar. Due to time constraints, however, we were unable to address all of the questions. Therefore, we have grouped them by theme and are presenting the responses as part of this FAQ.

Frequently Asked Questions

What is the likelihood that the negative outlook for U.S. banks will eventually lead to a rating being lowered?

Roughly a third of U.S. banks currently have a negative outlook. The duration and severity of the economic downturn and the strength of the recovery will likely be the biggest factors determining whether negative outlooks on U.S. banks result in downgrades. The effectiveness of various government measures to support individuals and businesses will also play an important role. The longer the downturn lasts, the weaker the recovery will be, and the less effective the government measures are, the greater the increase in bank loan losses, which would trigger downgrades. On a positive note, U.S. banks entered this economic downturn with the best capital, liquidity, asset quality, and profitability they have had in many years. As such, banks are well positioned to cope with economic strain. That said, we expect to take numerous actions if the economy performs worse than our economists have forecast.

During Q1 reporting, European banks seemed to have taken fewer loan losses compared to their U.S. peers. How would you assess European banks' loan loss provisioning compared to their U.S. counterparts, and do you expect to see further loan losses in Europe in 2020?

A more conservative approach to loan loss provisioning in U.S. generally accepted accounting principles (GAAP) rules compared to International Financial Reporting Standards (IFRS) will generally mean that, all else equal, reporting provisioning will be higher for U.S. banks than for their European counterparts. Still, there are a range of other factors that influence the level of losses that banks are likely to face. The extent and effectiveness of COVID-19-related fiscal support programs to households and corporates can limit defaults experienced by banks, as can more generous social safety nets in normal times. This includes employment support programs in a number of European economies aimed at limiting job losses, which may in turn limit losses on consumer loans and mortgages. In the U.K., for example, history shows that outsized credit losses in consumer loans correlate with peaks in unemployment. Loan forbearance activity (aimed at preventing borrowers' liquidity shortfalls from rapidly turning into solvency constraints) may also help limit the extent of realized credit losses, particularly given expectations of a strong rebound in European economies into 2021. In other words, short-term forbearance activity now may limit credit losses later.

However, this does not mean that European banks will be immune to an increase in credit losses through 2020. One of the factors that will drive up provisioning is the fact that corporate borrowers in some industries (such as leisure, oil and gas, and shipping) have likely not undergone a temporary weakening, something that banks will have to recognize sooner rather than later. Some borrowers will never recover, which could be for two reasons. First, despite ultra-cheap debt, they were already struggling amid Europe's slow-growing economies and marked structural trends in consumption. Second, the mitigation provided by fiscal stimulus--much of which leads to the roll-up of debt, not the avoidance of it--is too little or too late to be of practical help to those borrowers. Moreover, this effect becomes more profound under the adverse case of ineffective mitigation of economic stress and/or delayed or sclerotic economic recovery.

Which asset types are in fully supported or partially supported programs, and which indicators of stress are the most informative for ABCP investors?

Of the 48 U.S. ABCP programs rated by S&P Global Ratings as of Feb. 29, 2020, net investment was $216 billion. Of this amount, $180.3 billion, or 83.5% 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. Partially supported assets make up $35.5 billion, or 16.5% of total ABCP outstanding. Partially supported assets are well diversified, with the four largest sectors being autos (9.2%), including subprime autos (1.8%); student loans (2.1%); credit cards (1.2%); and dealer floorplan (1.0%).

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 and auto dealer floorplan (ADFP) 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%. Similarly, for dealer floorplan transactions, COVID-19 and its related health containment measures are impairing the ability of auto dealers to sell the vehicles that underpin the floorplan loans. As auto manufacturers provide the inventory and financial support to dealers to support vehicle sales, their downgrade risk is a significant issue for non-diversified ADFP transactions. However, principal payment rates still remain above the transaction payment rate/early amortization trigger levels with available credit enhancement more than sufficient to cover a 'A' stress.

Will S&P Global Ratings require defaulting assets to be removed, or can they amortize in the conduit if the sponsor remains sufficiently highly rated?

S&P Global Ratings is not in a position to require any assets to either be added or removed from conduits. We review documentation provided to us and ascertain the level of risk in accordance with published criteria for the respective asset type. Conduit sponsors may decide to leave certain assets in the conduit during their amortization period due to some mitigating factors (e.g., utilizing fungible program-wide credit enhancement, benefiting from increased transaction enhancement, or modifying liquidity to wrap credit risks).

Will S&P Global Ratings monitor the number of transactions in a portfolio that have undergone waivers/covenant amendments due to the impact of COVID-19?

We are seeing amendments to partially supported transactions across asset classes whereby lenders are granting extensions to provide some relief for those experiencing temporary hardships. Cash collections could decline from normal levels over the next few months due to deferrals and delinquencies. Wireless providers and utility companies, however, are not cutting off service for those customers who are late on payments or request payment assistance due to COVID-19-related hardships. In certain cases, COVID-19-related receivables will be excluded from being an eligible receivable or from certain performance metrics, such as delinquency and default trigger calculations. Some transactions are even temporarily amending default or delinquency triggers while increasing enhancement in the deals. While we still don't have the complete picture, we will continue to monitor the collateral performance as data comes in for April and beyond.

There have been some draws on liquidity facilities. Can you provide some additional color on that?

To protect holders of maturing ABCP notes against the possibility of the conduit being unable to roll ABCP notes, most ABCP conduits we rate have access to one or more committed liquidity facilities from highly rated third-party financial institutions, which can be used as a source of repaying the maturing ABCP.

S&P Global Ratings does not provide short-term ratings on any ABCP supported by a liquidity facility that requires a general market disruption event prior to the draw-down of liquidity. Our ratings on ABCP supported by third-party liquidity reflect our view that a conduit's inability to roll ABCP may arise for a variety of reasons, which may be specific to the related issuer or of a more general nature. Regardless of the reason, in a structure where a committed liquidity facility is provided, the inability to issue new ABCP is the precise scenario in which access to this facility may be necessary to enable investors to be repaid in full on the maturity date.

Committed liquidity facilities provide not only market disruption protection for the ABCP investor, but also additional funding flexibility for the conduit administrator. In the latter case, for example, where spreads on ABCP notes widen to uneconomic levels as we recently witnessed, the administrator may elect to draw under the committed liquidity facilities instead of issuing new ABCP notes. These third-party liquidity facilities are provided specifically to protect the investor in times of liquidity stress. Some sponsors took advantage of this funding flexibility and drew on the liquidity facilities while stating that the conduits remain an important part of the bank's overall business they will continue to support.

To what extent are conduits using the Fed's Commercial Paper Funding Facility?

The Fed announced the Commercial Paper Funding Facility (CPFF) on March 17, 2020. Its purpose is to increase liquidity in the ABCP markets and reduce rollover risk, especially when a large volume of ABCP was maturing overnight. Some sponsors reiterated the high cost of registering with the facility along with the steep pricing of overnight index swap (OIS)+110 basis points (bps) for 'A-1' paper. However, others did sign up because they wanted a contingent funding source in the event conduits were not able to issue when existing ABCP matured. Overall, the facility's presence helped to calm the markets and get spreads back at more normalized levels and tenors lengthening to a month or longer.

The CPFF aided in tightening spreads between the first week of March and the end of March/early April. For example, overnight paper spreads tightened by approximately 100-150 bps during this period. Tenors lengthened to weekly or one to three months versus the majority of paper rolling overnight at the beginning of March. In comparison, spreads for highly rated ABCP are typically close to LIBOR (ranging between -5 bps and +10 bps).

Do you have sense of whether European ABCP will get relief on disclosure requirements from regulators during the pandemic?

From our discussions with market participants, the general expectation is that the new Regulatory Technical Standards (RTS) will be published in the Official Journal (OJ) of the European Union in the coming weeks. The new disclosures would become effective 20 days after publication. We have not heard of any regulatory relief in light of COVID-19 and understand the RTS remains on track to be published imminently. A new Q&A was published by the European Securities and Markets Authority on May 28, 2020, which clarifies how certain fields in the new disclosure templates should be completed, including specific fields for ABCP issuers.

What will S&P Global Ratings' action be if there is a deteriorating ABCP portfolio in a fully supported conduit?

The underlying asset quality for fully supported conduits is immaterial to our rating analysis. Our ratings on fully supported ABCP are based solely on the credit quality of the liquidity providers and do not provide any benefit to cash flows that may be received on the underlying assets. Therefore, even if there is significant deterioration in the credit quality of the underlying assets, this would not impact our rating of the ABCP.

How have ABCP and ABS been pricing in primary and secondary markets? Are there signs of paper backing up? What is the state of liquidity?

In Europe, we understand that ABCP is not currently eligible for any of the funding programs launched by central banks. As a result, we hear that investors have been hesitant to invest in longer tenors of Eurocommercial paper, and issuance has largely been limited to overnight to weekly paper. Meanwhile, in the U.S., we've heard that including U.S. ABCP in the CPFF has opened up longer tenors once again, with paper trading out to six months.

S&P Global Ratings' ABCP ratings are weak-linked to the rating of the liquidity providers. Which rating type is applicable for the bank providing the liquidity support: the issuer credit rating or resolution counterparty rating?

Resolution counterparty ratings (RCRs) reflect 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. We maintain a narrow classification of RCR liabilities, limited to liabilities that are explicitly specified in law as being excluded from bail-in. 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. As a result, we have published jurisdictional assessments for each country where we assign RCRs to financial institutions (see "What's Next For Resolution Counterparty Ratings?" published March 2, 2020).

ABCP liquidity facilities are typically structured as unsecured funding commitments of the liquidity provider. These liabilities are not explicitly excluded from bail-in, so RCR would generally not apply for the ABCP liquidity facilities. As a result, for unsecured liquidity commitments, we typically weak-link the ratings of the ABCP to the issuer credit rating of the liquidity provider.

What are S&P Global Ratings' views on auto loan performance?

In our view, extensions will likely remain elevated for May due to continued high unemployment levels. However, as states start to reopen and workers are called back, we would expect extensions to decline and a greater number of obligors to resume their payments. Nonetheless, unemployment levels are expected to remain high through the end of the year, and many of the temporary job losses may turn into permanent reductions in the work force. Once the extra $600 in unemployment benefits runs out at the end of July, we're likely to have a clearer picture of how the pandemic-induced recession is affecting borrowers' longer-term ability to pay their vehicle loans.

Related Research

• Effects of COVID-19 on U.S. Student Loan ABS, April 30, 2020
• U.S. Commercial Small-Ticket ABS Will Be First In Sector To Feel Impact of COVID-19, April 13, 2020
• The Potential Effects Of COVID-19 On U.S. Auto Loan ABS, March 26, 2020
• Credit FAQ: Assessing The Credit Effects Of COVID-19 On U.S. And Canadian Credit Card ABS, March 25, 2020