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Asset backed commercial paper
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More on asset-backed commercial paper
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Updated 27th August 2002
The distinction between asset-backed securities and asset-backed commercial paper is primarily one of the tenure of the paper - commercial paper by definition is short-term funding, and is therefore mostly used for short-term assets such as trade receivables.
Asset backed commercial paper (ABCP) is a device used by banks to get operating assets such as trade receivables funded by issuance of securities. Traditionally, banks devised ABCP conduits as a device to put their current asset credits off their balance sheets and yet provide liquidity support to their clients.
For example, assume Bank A has a client X, whose working capital needs are funded by the bank. If the bank wants to release the regulatory capital that is locked in this credit asset, the bank can set up a conduit, eseentially an SPV that issues commercial paper. The conduit will buy the receivables of the client and get the same funded by issuance of commercial paper. The bank will be required to provide some liquidity support to the conduit, as it is practically impossible to match the maturities of the commercial paper to the realisation of trade receivables. Thus, the credit asset is moved off the balance sheet giving the bank a regulatory relief.
So depending upon whether the bank provides full or partial liquidity support to the conduit, ABCP can be either fully supported or partly supported.
ABCP conduits are virtual subsets of the parent bank. If the bank provides full liquidity support to the conduit, for regulatory purposes, the liquidity support given by the bank may be treated as a direct credit substitute in which case the assets held by the conduit are aggregated with those of the bank.
Not only are ABCP conduits set up by banks, there are also large issuers who set up their own conduits.
From viewpoint of the number of originators throwing their receiables into the program, ABCP conduits are known as single originator and muliple originator conduits. In the latter case, the credit enhancements (and/or liquidity enhancements) are found both at the level of transfer by each originator (originator-level enhancement) and at the programme level.
ABCP market
As per Asset-backed Commercial Paper Trends and Advances IV, as of June 30, 2000, ABCP outstandings volume exceeded $570 billion.
By the end of year 2001, the outstanding ABCP volume had reached USD 745 billion, up from USD 641 billion year-end 2000.
Major administrators of ABCP
Some the notable administrators of ABCP in the US market are:
Citigroup N.A, ABN-AMRO Bank N.V., Banc One, N.A., JP Morgan Chase, General Electric Capital Corp., Westdeutsche Landesbank Girozentrale, Rabobank Nederland, Liberty Hampshire Co. LLC, Societe Generale, Bank of America National Trust & Savings Association, Canadian Imperial Bank of Commerce, Barclay's Bank PLC, Credit Suisse First Boston, First Union National Bank, Charlotte, Bayerische Landesbank Girozentrale, General Motors Acceptance Corp., Firstar Bank, N.A., and Dresdner Bank AG.