Asset-backed commercial paper (ABCP) outstanding in the U.S. grew to $281.4 billion at the end of 2021. We expect the market to remain in the $270 billion-$280 billion range in 2022, providing cheaper funding for banks as the Federal Reserve (Fed) hikes interest rates. We also expect more new-seller activity in existing ABCP programs to outpace the wind-down of previously funded transactions. S&P Global Ratings expects total ABCP outstanding to remain stable this year.
In Europe, the Middle East, and Africa (EMEA), strong issuance in the first half of 2021 catapulted growth in total ABCP outstanding to a four-year high of 10.9%, even as activity in the second half remained comparatively subdued. Growth in committed funding amounts continued with utilization rates improving approximately five percentage points, indicating that long-term interest in the market remains positive. Overall, we expect that stable growth under our base-case forecast, and any further increase will be dependent on overall economic conditions, the pace of recovery, and availability of liquidity.
In Japan, performance trends remained largely stable and unchanged from 2020.
Globally, the top 10 sponsors accounted for about 70.8% of all S&P Global Ratings-rated ABCP outstanding in the U.S. and EMEA as of December 2021.
Credit-Related Sensitivity For ABCP Remains Secondary
We expect the Russia-Ukraine conflict to have a limited direct impact on the ABCP transactions we rate.
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 the liquidity facility or support provider (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. Based on this, we currently expect no impact on our ratings on fully supported ABCP conduits over the next six months (see the Appendix).
For partially supported ABCP, we also considered asset performance in our analysis. 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.
In 2021, we lowered our rating on one program in the U.S. and one program in EMEA. However, in EMEA, we raised our rating on the program again in 2022, following an upgrade on the support provider. We continue to monitor any deterioration in support provider ratings and collateral performance over time.
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. We expect to publish ESG credit indicator benchmarks for major structured finance asset classes, including autos, credit cards, personal loans, student loans, residential mortgages, and commercial mortgages in the coming months.
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 entities' 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.
U.S.: Stable Issuance Likely As ABCP Provides Alternative Funding
Dev C Vithani, New York, (1) 212 438 1714; dev.vithani@spglobal.com
Radhika Kalra, New York, (1) 212 438 2143, radhika.kalra@spglobal.com
U.S. ABCP outstanding reached a peak of approximately $281.4 billion as of year-end 2021 (rising 8.6% in 2021 from $259.1 billion as of year 2020), driven by increased utilization rates typically seen in the fourth quarter, as client funding demands rise into the new year.
The U.S. economy posted a surprising 6.9% growth rate in the fourth quarter 2021 as damage from the omicron variant was less than expected, consumer spending rebounded and companies rebuilt inventories as they played catch-up with final demand (see the Related Research section). Despite the COVID-19 pandemic-related market uncertainties waning, elevated inflationary concerns, the ongoing supply chain disruptions, the worsening geopolitical conflict between Russia and Ukraine, and increasing oil prices could suppress U.S. economic activity and overall consumer spending growth; therefore, we expect GDP growth to be limited to 3.2% this year.
That said, the expectations for an aggressive policy tightening path of the Fed could eventually support 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. Despite the uncertainty from the worsening geopolitical tension between Russia and Ukraine, we now expect seven rate hikes in 2022 (the first increase of 25 basis points was on March 16, 2022), including potentially regular 50 basis point hikes, followed by at least four more hikes in 2023 (see the Related Research list). This trajectory will take the Fed beyond the neutral rate of 2.5% to reach 2.75%-3.0% in 2023. The Fed's tapering of asset purchases has ended, and the Fed is expected to reduce the size of its balance sheet starting in May. We do not expect an immediate significant change in incentives for short-term funding in the ABCP market on account of the rate increases until we begin to see a more permanent steepening of the yield curve. However, the ABCP sector still offers a unique product to investors and serves not only as an alternative capital market-based funding source for banks but also as a viable funding source to fuel economic growth.
We expect there will be more new seller activity in ABCP programs with new ABCP-financed origination to exceed the wind-down of existing transactions. Additionally, U.S. sponsors are anticipating building capacity with newly launched conduits and potentially increasing the issuance of existing ones, all of which support our projected levels of approximately $270 billion-$280 billion by year-end. This estimate is in line with the $264.7 billion outstanding as of April 20, 2022.
Chart 1
Conduit-level activity has remained strong since June 2021
Our ratings on ABCP outstanding remain stable. Since June 2021, we have rated issuances from several programs (see the Rating Actions section):
- Fairway Finance Co. LLC (sponsored by Bank of Montreal) is an existing fully supported conduit that added callable ABCP notes to supplement the outstanding standard ABCP notes.
- Lexington Parker Capital Co. LLC (managed by Guggenheim Treasury Services LLC) is an existing fully supported conduit that added a series B and series C standard, callable, puttable, and puttable/callable ABCP notes to supplement the outstanding series A notes.
- Endeavour Funding Co. LLC (sponsored by Nearwater Capital) is a fully supported conduit that uses proceeds derived 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.
- Regatta Funding Co. LLC (sponsored by Nearwater Capital) is a fully supported multi-seller conduit that will issue U.S. dollar-denominated 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, master or global repurchase agreements, and total return swaps.
- Alinghi Funding Co. LLC (sponsored by Nearwater Capital) is an existing fully supported conduit that added callable ABCP notes to supplement the outstanding standard ABCP notes.
In January 2022, we withdrew our 'A-1(sf)' rating on ABCP issued by Great Bridge Capital Co. LLC (managed by Guggenheim Treasury Services LLC) at their request.
Expected interest rate hikes position ABCP as a viable alternative funding tool
Banks, which typically serve as sponsors and administrators for ABCP programs, began the year well-positioned to remain in solid shape with respectable returns, stable asset quality, sound capital, decent profitability, robust funding, and liquidity at near best levels. Bank asset quality should remain in good shape absent an economic slowdown, with delinquencies and charge-offs on consumer loans rising negligibly, and certain commercial loan categories (e.g., commercial real estate with limited exposure in ABCP conduits) may face medium-term challenges.
The military conflict between Russia and Ukraine has created new risk dynamics across the globe, but its direct impact to banks is limited, with no direct or indirect consequences on its own leading to immediate rating actions (see Related Research).
Banks have also been coping with declines in net interest margins (a measure of a bank's interest income relative to interest on deposits) amidst an ultralow interest rate environment, which reduced the need for non-deposit funding, including ABCP. However, as the Fed implements a more restrictive monetary policy in 2022, notwithstanding the armed conflict in Ukraine potentially causing the Fed to limit the severity of the hikes, we expect net interest margins to climb from multi-decade lows, with net interest income expected to rise materially on accelerated loan growth. On the other hand, deposit growth is likely to slow meaningfully as the Fed tapers and then ceases its asset purchases and raises rates, which bodes well for the ABCP market (see Related Research). In fact, funding levels in the ABCP market do not show any signs of stress; spreads remain tight across the maturity spectrum as issuers continue to fund their clients via ABCP instead of bank liquidity draws or other credit facilities.
Alternative financing arrangements in ABCP rise
The rise in alternative financing arrangements (e.g., loan agreements, global or master securities lending agreements, global or master repurchase agreements, and hedge agreements in the form of total return swaps) with banks in ABCP conduits could potentially make it more burdensome for market participants, specifically those engaged in securities-based swaps, to comply with the Security Exchange Commission's (SEC's) newly proposed but not yet finalized rules: Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; and Position Reporting of Large Security-Based Swap Positions, issued on Dec. 15, 2021. These rules require any person to publicly report positions on underlying securities or loans that exceed certain thresholds. The rules on position reporting of large security-based swap positions on single, index debt or equity securities and loans are intended to promote transparency, protect market integrity, and decrease contagion risk in the market to assist the SEC in identifying concentrated positions and holdings in related securities. The swap position reporting requirement notional thresholds differ for debt versus equity security-based swaps starting from notional amounts of $150 million. We will continue to monitor the outcome of these rulings throughout the comment period as we have further discussions with bank and non-bank ABCP sponsors about their obligations to report their derivative portfolio holdings.
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 ratings on liquidity facility or support providers. Currently, we consider that none of the fully supported conduits could be affected based on the ratings on the liquidity or support provider (see the Appendix).
Partially supported assets' sensitivity in U.S. ABCP programs
Ratings on partially supported ABCP programs remain sensitive to asset performance. The U.S. ABCP sector and rating performance trend remains stable. We continue to expect stable collateral performance for prime auto loans and leases, dealer floorplans, commercial equipment, and private student loans. Meanwhile, the outlook for subprime auto loans, credit cards, unsecured consumer loans, and Federal Family Education Loan Program student loans is somewhat weaker (see table 1).
Table 1
Notably, exposure to the somewhat weaker sector in partially supported programs is only approximately 3.0% of the invested amount as of December 2021. 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 (see table 2). Because of these factors, we believe the overall impact on the ratings on programs with investments in these assets will be limited.
Table 2
We reviewed performance across these assets and the factors that we consider support our view on the rating trends (see table 3).
Table 3
Asset Trends And Impact On ABCP Performance As Of December 2021 | ||||||
---|---|---|---|---|---|---|
Asset | Observations on asset performance | Impact on ABCP performance(i) | ||||
Auto loans and leases | Auto loans: - Auto loan ABS issuance rose 29% in 2021 to $97.3 billion, which is the highest level since 2005. - Favorable financing conditions, economic stimulus payments, lower unemployment levels, and strong trade-in vehicle values primarily helped increased subprime financing and ABS activity. - Credit performance in both prime and subprime pools has been better than expected with recent securitizations' cumulative net losses trending well below prior vintages at the same seasoning point. - We expect 2022's issuance to increase modestly (8%) to $105 billion due to slightly higher new vehicle sales, vehicle price appreciation, and greater used vehicle financing by the captives. Auto leases: - Auto lease ABS issuance reached an all-time high of $27.4 billion in 2021, despite dampened new vehicle sales caused by supply constraints. - The record-high issuance volume was a 42% increase from 2020. - The low interest rate environment and robust used vehicle values were among the reasons for issuers to increase ABS funding in this sector. - We expect 2022's issuance to increase modestly by 8% to $105 billion due to slightly higher new vehicle sales, vehicle price appreciation, and greater used vehicle financing by the captives. | - Historically, autos have comprised the largest asset funded in partially supported ABCP programs. As of December 2021. - Total auto exposure was 30% of the net invested amount. - Prime auto loans comprised 73%, including leases at 19% and subprime at 8% of total invested amount of auto exposure. - Auto issuers typically rely on ABCP programs to provide an alternate funding source. Net investment decreased 21% in December 2021 to $16 billion from $20.5 billion in December 2020; however, the net investmentcontinued to decline in each month during fourth-quarter 2021. - The lower net investment during Q421 was reflective of the high auto ABS issuance during the same period in a low interest rate environment with expectations of hikes shortly after. - Similar to ABS, collateral performance remains very strong with minimal losses during the year and coverage of short tail losses of 245x by credit enhancement. | ||||
Credit card receivables | - Credit card issuance volume of about $18.0 billion in 2021 was more than three time greater than the $5.0 billion issued in 2020. - After a lackluster start, approximately 70% of 2021's issuance came in the second-half of the year. - This acceleration occurred as the market priced in the Federal Reserve’s plans to shrink its asset-purchase program and the likelihood of increases in interest rates, given inflation expectations. - Credit card receivables continued to demonstrate strong credit metrics as a result of highly seasoned accounts and high FICO scores. - These strong credit metrics when combined with originators' forbearance assistance programs and government assistance programs during the COVID-19 pandemic and consumer debt deleveraging resulted in strong performance in this sector. - We expect credit card ABS volume of approximately $17 billion in 2022, which is generally consistent with 2021's volume. | - Credit cards comprise 9% of net investment as of Dec 2021 in partially supported ABCP programs. - Bank cards comprise 66% and retail cards comprise 34% of the collateral. - Net investment in this sector increased 73% to $4.7 billion in Dec 2021 from $2.7 billion in December 2020. - While credit card balances declined significantly during the pandemic as consumers scaled back spending and increased savings, the recent turn in the economic cycle bode well for this sector as reflected in lower saving rate and higher consumer spending, thereby leading to higher utilization in the ABCP programs. - Credit performance remained very strong during 2021 with credit enhancement covering short tail losses by 67x in December 2021. | ||||
Commercial assets | - Commercial ABS issuance is expected to grow to a range between $26 billion and $28 billion in 2022 following an approximate 19% increase in 2021 to $25.4 billion. - Issuance volume for three of the four commercial ABS segments (captive equipment, independent, and fleet lease) experienced year-over-year increases in 2021, just about reaching pre-pandemic levels. - Fleet lease issuance increased by 50% to $6 billion in 2021, even though the chip shortage reduced supply of new vehicles. Fleet lessors experienced longer vehicle delivery lead times and reduced fleet incentives throughout 2021 that resulted in higher costs. In response to these market conditions, issuers were able to manage customer demand and the limited supply in part by offering alternative vehicle makes or types. - However, dealer floorplan unexpectedly continued its decline as there was no issuance from non-diversified floorplan issuers. Non-diversified trusts had low origination growth and more excess cash available as limited new vehicle supply attributable to the chip shortage and faster inventory turnover drastically increased payment rates for these trusts. - Stable credit trends are expected in 2022 for equipment ABS collateral pools with strong recovery values intact and forecasted economic growth. | - Equipment and fleet leases represent 4.3% of the net investment in the partially supported ABCP programs and contribute greatly to the 37% increase in net investment to $2.3 billion in December 2021 from $1.6 billion in December 2020. - Issuers in this segment continued to diversify their low-cost funding sources beyond the ABS market by accessing capital via ABCP despite the COVID-19 economic dislocation. - On the other hand, net investments for dealer floorplans, which comprises 1.4% of the partially supported universe, declined 64% in 2021 to $736 million from $2.0 billion in December 2020. This stemmed from the chip shortage and limited supply of new vehicles, which had an outsize impact on the non-diversified trusts and their ability to generate longer-dated receivables. - On a positive note, payment rates surged to record levels (over 100%), well above transaction amortization triggers, resulting from faster inventory and related receivable turnover. - Overall, credit performance remains strong for the equipment sector with 36x coverage of short tail losses by credit enhancement. | ||||
Student loans | - Student loan volume increased in 2021 to $30 billion, which was primarily driven by the securitization of loans from the Wells Fargo portfolio of PSL under the Nelnet issuer name combined with a one-time increase in FFELP issuance. - PSL collateral reflects consistent credit profiles and the borrowers maintained stable performance throughout the pandemic. - Credit is anticipated to be strong among post-2009 PSL transactions and to continue into 2022, with some negative rating actions on the small, speculative grade set of outstanding pre-2009 PSL classes. - The one time increase after several years in FFELP issuance was relating to deal activity from state student loan authority issuers by Navient and Nelnet. A few of these transactions were refinancing previously issued transactions so we don’t expect to see much of this activity in 2022. - The credit quality of FFELP student loan ABS is expected to remain stable due to the U.S. government’s guarantee on the underlying loans. - We expect 2022 student loan ABS issuance to be slightly lower than in 2021, at $30 billion, with strong private student loan (PSL) issuance offset by lower FFELP issuance. | - Student loans comprise approximately 5% of net investment as of Dec 2021 in partially supported programs. PSL comprise 75% and FFELP comprise 25% of the collateral. - Net investment in this sector decreased 48% to $2.8 billion in Dec 2021 from $5.4 billion in Dec 2020. During the same period, FFELP commitments decreased 65% to $1.2 billion from $3.3 billion while net investment decreased 78% to $711 million from $3.2 billion. This continues to reflect the macro factors effecting this asset class, specifically discontinuance of the FFELP loans since 2010. - Private loan commitments decreased by only 4% to $4.0 billion from $4.2 billion while net investment decreased by 6%. - Credit performance remains satisfactory to strong with 19x coverage of short tail losses by credit enhancement. | ||||
Consumer-other | - Personal loans reached a new all-time high in 2021 of $17 billion after hitting a low in 2020, versus issuances from the previous high of $15 billion in 2019. The surge in issuance in 2021 was directly attributable to deal flow from marketplace lending platforms. The strengthening economy, falling unemployment and favorable loan performance during 2021 led to loan origination growth and increased confidence and demand from investors. - For 2022, we forecast total issuance will build on this year’s momentum and reach $20 billion. We expect credit performance to remain stable in this sector. - Verizon continues to be the only U.S. wireless carrier to issue ABS bonds backed by device payment plan agreements and transactions continued to show little or no effect from the COVID-19 pandemic in terms of delinquencies and losses. We believe this is because of the essential nature of wireless devices and their affordability. We project Verizon’s annual volume for 2022 at $3.0-$4.0 billion, likely up slightly from its 2021 volume of $3.1 billion. The credit performance of DPPA loans and DPPA-backed ABS bond transactions is expected to remain stable going forward. | - Consumer other comprises 4% of net investment in the partially supported ABCP programs and primarily includes mobile handsets (90%) and unsecured consumer loans (10%), which includes marketplace lending. - Net investment increased 44% to $2.2 billion in Dec 2021 from $1.5 billion in Dec 2020. The increased net investment was primarily due to a 114% increase in mobile handsets to $2.2 billion in December 2021 from $1.5 billion in December 2020 offset by a 66% decrease in unsecured consumer loans to $232 million from $611 million in Dec 2020. - ABCP programs continue to be an essential source of funding for the mobile handset sector as reflected in the high utilization rates offset by low net investment for unsecured consumer loans as issuance was robust in ABS during 2021 buoyed by expectations of rising interest rates. - Collateral performance was strong with 29x coverage of short tail losses by credit enhancement. | ||||
Trade receivables | - The utility industry is currently on negative outlook by S&P Global Ratings. The industry's capital spending has exceeded a record $170 billion for 2021, reflecting necessary investment in energy transformation, safety, and reliability. In addition, this industry has a heavy focus on ESG in the upcoming years, which can likely hinder the credit quality of the industry. During the COVID-19 pandemic, many utilities either delayed collecting on bills or cutting off the power. In addition, inflation, rising interest rates, or higher commodity pricing can further make it difficult to manage regulatory risk because it may be difficult for utility companies to recoup costs via customer bills. - Over recent months, S&P Global Rating’s rating actions across the consumer product companies have been mainly positive. This reflects these companies' higher-than-anticipated resilience to tough operating conditions during the COVID-19 pandemic. Household products' key challenge is meeting still elevated demand with supply chain constraints and inflation. However, as supply and demand pressures gradually abate and the labor shortage eases, this sector will benefit. Companies continue to look for offsetting cost efficiencies, selective price increases, product rationalization, and launches at premium prices to limit the impact of inflation on margins. | - Trade receivables are almost exclusively funded in ABCP programs. Currently, S&P Global Ratings rates only one U.S. ABS trade transaction with $198.4 million invested amount as of December 2021. - Trade receivables comprise approximately 2% of net investment as of December 2021 in partially supported ABCP programs. - Net investment decreased 43% in December 2021 to $876 million from $1.5 billion in December 2020, which reflects the macro-economic factors during the COVID-19 pandemic, which impacted utilities and reduced consumer spending due to lock downs, global supply chain issues, and inflation. - Utilities represent the largest exposure in the trade portfolio at 55% of the net investment in ABCP partially supported programs as of February 2022. - The second largest sector in the trade portfolio is consumer goods and more specifically, durables and household products at 24% of the net investment in ABCP partially supported programs as of February 2022. - The credit performance of trade receivables, while slightly weaker during 2021, continues to remain satisfactory to strong with 18x coverage of short tail losses by credit enhancement. | ||||
(i)The short tail loss coverage multiples are even higher if we consider total credit enhancement in the transactions. ABCP--Asset-backed commercial paper. ESG--Environmental, social, and governance. PSL--Private student loans. FFELP--Federal Family Education Loan Program. |
We will continue to monitor any impact on our conduit ABCP ratings as a result of the changes in macroeconomic conditions. 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 2021 accounted for the majority of the ABCP outstanding in the U.S., at about 98.6%, while the rest of the issuances were denominated in euros and British pound sterling (see chart 2).
As of Dec. 31, 2021, three sponsors (Citibank, JPMorgan, and Royal Bank of Canada) represent the nine partially supported programs, totaling $52.8 billion of ABCP outstanding, which makes up 21.8% of the total U.S. ABCP that we rate (see the Appendix). The remaining 45 programs (44 programs as of April 27, 2022) in the U.S. are fully supported and total about $189.7 billion, or 78.2% of the total U.S. ABCP that we rate (see the Appendix).
As of Dec. 31, 2021, traditional assets, such as auto loans and leases, credit cards, student loans, consumer loans, and equipment loans and leases, make up about 35.0% of the collateral in all conduits (see chart 3) and 76.9% of the collateral in partially supported programs (see the Appendix).
Chart 2
Chart 3
Typically, the impact of macroeconomic factors is similar for ABS and ABCP assets, resulting in similar credit performance trends as evidenced in the past year. While high interest rates result in high borrowing costs for the issuers, an upward sloping yield curve eventually benefits ABCP issuance due to lower short-term rates. The expectation of higher interest rates spurred ABS issuance in 2021; however, it led to lower utilization in the ABCP sector, specifically for autos, which constitutes the largest asset class funded in ABCP programs.
EMEA: Strong Issuance In First-Half 2021 Propels Growth To A Four-Year High
Florent Stiel, Paris, +33 (0)1 4420 6690; florent.stiel@spglobal.com
Matthew S Mitchell, CFA, Paris, +33 (0)6 1723 7288; matthew.mitchell@spglobal.com
The total S&P Global Ratings-rated ABCP outstanding from conduits domiciled in EMEA increased 10.9% to $117.8 billion as of December 2021 from December 2020. This is the fastest growth since 2017, continuing the momentum from the second half of 2020. Most of this growth occurred in the first-half 2021, with volumes sustaining through the second half of 2021.
We continue to observe strong growth in conduits funding investment contracts with highly rated financial institutions. The ABCP outstanding for these conduits increased almost 44.9% to $39.7 billion from $27.4 billion in 2020. We understand this is driven by strong investor demand for short-term paper as large amounts of government stimulus limited banks' funding requirements. We expect stable growth under our base-case forecast this year, with any further uptick depending on the overall economic conditions, pace of economic recovery, and availability of liquidity.
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.
We expect GDP growth of 3.3% this year in the Eurozone and 3.5% in the U.K. Our global bank credit loss forecasts estimate a broadly healthy level of capital across the top 200 rated banks and comfortable headroom to absorb further losses without depleting capital. We expect that European banks can manage the economic spillovers from the Russian-Ukraine conflict under our base case that envisions reduced but still positive economic growth in 2022. Compared to the start of the year, we now expect European banks will see lower loan and business growth, as well as limited uptick in costs, but we do not see these effects as likely to significantly test our view of the creditworthiness of most European banks.
Based on total ABCP outstanding as of Dec. 31, 2021, U.S.- and Japan-based financial institutions provide liquidity facilities or are support providers for about 7.1% of the conduits we rate, with the rest provided by European banks. Currently the outlook on most of the support providers for ABCP outstanding in EMEA is either positive or stable.
We assessed the sensitivity of ABCP conduit ratings in EMEA to rating changes on the support provider (see the Appendix). Based on our analysis, none of the conduits is currently vulnerable to a change in the credit rating on the support provider. We also expect the Russia-Ukraine conflict to have a limited direct impact on the conduits we rate. However, we will continue to monitor any changes to the support provider ratings.
We rated a new conduit, Great Bear Funding DAC, in October 2021. We also withdrew our ratings on Curzon Funding Ltd. and Viking Asset Securitization Ltd. in February 2021 and December 2021, respectively. In July 2021, we lowered our ratings on Opusalpha Funding Ltd. to 'A-2 (sf)' from 'A-1 (sf)', since the short-term rating on Landesbank Hessen-Thüringen Girozentrale, the support provider, was lowered. In April 2022, we raised our ratings on Opusalpha Funding Ltd. back to 'A-1 (sf)' from 'A-2 (sf)', since the short-term rating on Landesbank Hessen-Thüringen Girozentrale, the support provider, was raised in March 2022. Other than these rating actions, the ratings on all other ABCP programs remained stable during 2021.
Committed funding amounts increased about 4.6%, indicating resilience in longer-term commitments within programs, as well as improving market interest (see chart 4). Overall utilization rates improved to almost 79.3%, up from about 74.8% in December 2020.
Chart 4
Key trends in program composition
More than 99.0% of the ABCP outstanding issued by European conduits are denominated in U.S. dollars, euros, and British pound sterling. Although volumes improved across all three currencies, we observed a sharp uptick in U.S.-denominated issuances, that contributed to 89.1% of the growth in ABCP outstanding since December 2020. (see chart 5). The increase in issuances also stemmed largely from conduits funding investment contracts.
Chart 5
The share of single-seller programs increased to about 13.7% from 9.5% in 2020, due to higher issuances particularly from conduits backed by investment contracts. Issuances increased across 'A-1+', 'A-1' and 'A-2' rated programs with their shares remaining largely stable (see Appendix).
Sharp growth in funding of investment contracts offsets decrease in autos
Total asset investments in EMEA rose 6.4% as of Dec. 31, 2021, compared with 2020, with increases in commercial assets and trade receivables, which was offset to some extent by a decline in autos and consumer assets (see chart 6). The share of investment contracts, such as repurchase agreements, total return swaps, and securities lending agreements, reached about a third of all asset investments, up from around 23.0% in 2021 and 16.0% in 2017. At the same time, asset investments in autos have been steadily declining to reach 15.2% at the end of 2021, from 19.5% in December 2020, and an even higher 22.6% in 2017. The share of trade receivables has remained largely stable between 34.0%-38.0% over the last five years. As of Dec. 31, 2021, total assets in conduits funding investment contracts reached $41.9 billion, doubling from around $20.5 billion in 2017. About 60.0% of this growth came from 2021 alone. This has increased total investments in commercial assets.
Chart 6
Of all assets, over 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.
Japan: Overall Market Activity Remains Stable
Toshiaki Shimizu, Tokyo, (81) 3 4550 8302; toshiaki.shimizu@spglobal.com
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 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 transaction parties' requests.
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, 2021, the top 10 sponsors globally are concentrated in the U.S. and EMEA. They formed about 70.8% of S&P Global Ratings-rated ABCP issuances outstanding in these two regions, down from 72.3% since December 2020. The top three sponsors hold about 33.5% of the total issuance volumes in the U.S. and EMEA, slightly lower than 36.2% in December 2020.
In the U.S, the top 10 sponsors, administrators, and managers accounted for 72.5% of the total ABCP outstanding as of Dec. 31, 2021 (see the Appendix). The top 10 liquidity providers accounted for a combined commitment of approximately $206.7 billion, or 85.7%, of the $241.3 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 91.9% of the total ABCP outstanding as of Dec. 31, 2021, versus 88.8% as of Dec. 31, 2020 (see the Appendix). The top 10 liquidity providers represented a combined commitment of approximately $115.7 billion, or 78.8% of the $146.8 billion support available for the ABCP we rate in EMEA.
Table 4
Rating Actions
- Fairway Finance Co. LLC's Callable ABCP Notes Assigned Ratings, April 18, 2022
- Opusalpha Funding Ltd. ABCP Program Rating Raised Following Counterparty Upgrade, April 5, 2022
- New Issue: Great Bear Funding DAC, Oct. 29, 2021
- New Issue: Lexington Parker Capital Co. LLC, Sept. 10, 2021
- New Issue: Endeavour Funding Co. LLC, Aug. 30, 2021
- Opusalpha Funding Ltd. ABCP Program Rating Lowered Following Counterparty Downgrade, July 20, 2021
- Rating Lowered On Autobahn Funding Co. LLC ABCP Notes, June 30, 2021
- New Issue: Regatta Funding Co. LLC, June 21, 2021
- Alinghi Funding Co. LLC U.S. Callable ABCP Notes Rated, June 14, 2021
- New Issue: Pure Grove Funding, May 26, 2021
- New Issue: Ionic Capital III Trust, May 6, 2021
- New Issue: Lexington Parker Capital Co. LLC, April 30, 2021
Related Research
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- EMEA Structured Finance Chartbook: April 2022, April 11, 2022
- U.S. Auto Loan ABS Tracker: February. 2022, April 8, 2022
- Global Credit Conditions Q2 2022: Confluence of Risks Halts Positive Credit Momentum, March 31, 2022
- Economic Outlook U.S. Q2 2022: Spring Chills, March 29, 2022
- U.S. Credit Card Quality Index: Monthly Performance-–February 2022, March 29, 2022
- Credit Conditions North America Q2 2022: Hazard Ahead: Risk Intersection, March 29, 2022
- Economic Outlook U.K. Q2 2022: A Painful Surge In Inflation, March 28, 2022
- U.S. Financial Institutions Ratings See Some Indirect Increased Risk From The Armed Conflict In Ukraine, March 17, 2022
- Moving the Russia-Ukraine Scenario Needle: European Output At Risk, March 16, 2022
- S&P Global Ratings Expects The Russia-Ukraine Conflict To Have Limited Direct Impact On Global Structured Finance, March 3, 2022
- Global Bank Credit Loss Forecasts: Lower Losses Ahead, Feb. 23, 2022
- The Top Trends Shaping European Bank Ratings In 2022, Jan. 31, 2022
- European Structured Finance Outlook 2022: Clearer Skies, Jan. 27, 2022
- ESG Credit Indicators Report Card: North American Banks, Jan. 19, 2022
- ESG Credit Indicator Report Card: EMEA Banks, Jan. 19, 2022
- ESG Credit Indicator Report Card: Asia-Pacific Banks, Jan. 18, 2022
- Global Structured Finance 2022 Outlook, Jan. 12, 2022
- U.S. Bank Outlook 2022: Higher Rates To Provide Boost In Uncertain Times, Jan. 12, 2022
- Japan Structured Finance Outlook: Coexisting With COVID, Jan. 7, 2022
- European Economic Snapshots: From Fast-Paced Recovery To Robust Expansion, Dec. 6, 2021
- Inside Global ABCP: Stable Ratings And Modest Issuance Growth Likely As Economy Rebounds, Oct. 29, 2021
- ESG Credit Indicator Definitions And Application, Oct. 13, 2021
- Credit FAQ: How Could Cyber Risks Affect Structured Finance Transactions?, Sept. 8, 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
- 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
Appendix
The appendix tables can be accessed via the following link:
https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/101528857
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.
Assessing Sensitivity of Rating On A Fully Supported Conduit
In Appendix 1a, 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.
This report does not constitute a rating action.
Primary Credit Analysts: | Dev C Vithani, New York + 1 (212) 438 1714; dev.vithani@spglobal.com |
Florent Stiel, Paris + 33 14 420 6690; florent.stiel@spglobal.com | |
Toshiaki Shimizu, Tokyo + 81 3 4550 8302; toshiaki.shimizu@spglobal.com | |
Secondary Contacts: | Radhika Kalra, New York + 1 (212) 438 2143; radhika.kalra@spglobal.com |
Matthew S Mitchell, CFA, Paris +33 (0)6 17 23 72 88; matthew.mitchell@spglobal.com | |
Research Contributors: | Vidhya Venkatachalam, CFA, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
Andrea Valverde, New York; andrea.valverde1@spglobal.com | |
Katarina Felix, New York; katarina.felix@spglobal.com | |
Pooja Vador, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai | |
Pankaj Tari, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai | |
Diksha Panjri, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai | |
Kunal R Gupta1, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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