What Is an Asset-Backed Commercial Paper?

Asset-backed commercial paper (ABCP) is a commercial paper with asset securitization nature. It is owned by large enterprises, financial institutions or multiple SMEs and can generate stable cash flows in the future. A structural arrangement in which assets are sold to a trustee, and the trustees use these assets as a basis to issue commercial paper and sell them to investors in exchange for the required funds.

Asset-backed commercial paper

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Asset support

Asset support

It first appeared in the 1980s.

Typical asset support

Due to asset support

This is asset backed

This is usually done by the arranger or sponsor. Asset support

The originating bank usually gives

Liquidity Support Provider

Because there is a certain mismatch between the assets used to support the issuance of notes and the maturity of the notes, liquidity support is very important in the structural arrangement of asset-backed commercial notes. In general, the originating bank, or an independent third party,

From the mature experience of developed markets,

Asset support

As a financing tool, asset-backed commercial paper has the dual characteristics of commercial paper and asset securitization.

High credit rating and low default rate

As mentioned earlier, with the 1991 amendments to Articles 2a-7 of the Investment Company Law by the Securities and Exchange Commission in 1991, the issuer has strengthened its credit rating through various means to attract money market fund investment. According to a research report issued by Standard & Poor's (2004), among the asset-backed commercial papers circulating on August 4, 2004, A-1 +, A-1, A-2, and A-3 asset-backed commercial paper offices The proportions are 78.9%, 20.8%, 0.0%, and 0.4%, which means that almost all asset-backed commercial paper can meet the high-level requirements of investors.

According to a research report released by Moody's (2000), a total of 113 asset-backed commercial paper projects have withdrawn from the market since 1995, of which 103 are P-1, 9 P-2, and 1 are NP. In other words, 91.15% of the asset-backed commercial papers reached the highest standards. Corresponding to the high credit rating is the low default rate. According to the research reports of the three major international rating agencies, there has been basically no default in the issued asset-backed commercial papers. It is caused by the downgrade of the level of liquidity supporters or credit enhancers in the transaction structure, which brings investors a very safe investment channel.

Short issuance period and strong liquidity

As a commercial paper, the biggest difference between asset-backed commercial paper and other asset-backed securitization products is that the issuance period is short. Take US asset-backed commercial paper as an example. In order to achieve the purpose of exempting the SEC from registration, many issuers limit the duration of the bill to less than 270 days. According to the data released by the Federal Reserve, the AA-level asset support issued at the end of 2005 The proportion of commercial paper with maturity within 80 days reached 95%.

Moody's, Standard & Poor's, Merrill Lynch, and JP Morgan Corp. and other related research results show that the typical objects used in asset-backed commercial paper projects as supporting assets include trade receivables, credit card receivables, etc. The future cash flow and default rate of these payments can be accurately predicted, so investors are happy to hold these assets. At the same time, the receivables, which are the basis of the issue, can be continuously generated, so that the seller can issue notes in a rolling manner and obtain a relatively stable source of funds. In addition, because the maturity date of asset-backed commercial paper ranges from 1 to 4 days to 270 days, investors can freely choose the required investment objects according to the needs of asset and liability matching.

Comprehensive risk control and high security

According to the structural arrangement of asset-backed commercial paper, the issuer has established a number of risk control measures, including the credit quality requirements of the original beneficiaries before securitization, the credit analysis of the underlying assets entering the asset portfolio, and the diversification requirements of the portfolio; securities In the process of legalization, it is necessary to reduce credit risk in terms of legal structure arrangements, such as the legal isolation of the underlying asset from the original beneficiary's default, and the risk of default from the service provider, etc .; while credit enhancement measures and liquidity support arrangements can reduce the original After the securitization, rating agencies and project managers will continue to monitor the market performance and credit quality of the notes (including the credit status of liquidity supporters and credit enhancers) and monitor transactions. The qualifications of all parties are judged and analyzed, and timely adjustments are made when necessary to ensure the safety of the project.

Under normal circumstances, investors in commercial paper are usually able to be repaid through the issuance of new notes or the potential cash flow generated from supporting asset pools. In order to ensure that investors can receive timely and full payment in the event that new notes cannot be issued or expected cash flows cannot occur, asset-backed commercial paper projects use liquidity to support funds; and specific asset pools and the entire project's Credit enhancement can also support liquidity in potential projects. Table 2 shows the characteristics of the four layers of legal protection.

Support rich assets and many options

Similar to asset securitization products, asset-backed commercial paper projects have many options for supporting assets. Traditional trade receivables, short-term bank loans, long-term loans, financial leases, car loans, credit card receivables, and residential mortgage loans, Asset-backed securities can be used as potential asset pools for commercial paper issuance. The distribution of US dollar-denominated asset-backed commercial paper assets in the world15, including securities, trade receivables, car loans, mortgages, credit card receivables Is the most common underlying asset, accounting for 21%, 11%, 11%, 11%, and 9%, and a Moody's (2004) statistic shows that in all asset-backed commercial paper projects Among them, asset-backed securities and trade receivables are the largest underlying assets, accounting for 40% and 25% respectively (see Lan Giddy, 2005, Asset-Backed Securities: Asset-Backed Commercial Paper, working paper).

Due to the variety of basic asset pools, different asset sellers can participate in asset-backed commercial paper projects, especially those SMEs, which can open a new financing channel in addition to traditional bank loans; and trustees can also According to different asset classes and credit quality, a decentralized investment portfolio is formed to meet the needs of different investors. In addition, due to the flexibility of the asset pool, investors in commercial paper are protected from losses in the event that the financial performance of the asset pool deteriorates. A typical asset-backed commercial paper project usually has four distinct levels of legal protection to protect investors from losses: credit enhancement for specific asset pools, credit enhancement for the entire project, and liquidity support for specific asset pools As well as the whole, it can be issued according to the traditional single model, or different assets of different companies can be included in it, thereby making investors' options wider.