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It’s as easy as ABCP

Rapid growth in the asset-backed commercial paper market has stretched liquidity lines. Sponsors have therefore begun to develop innovative new structures to cope with the problem

Deals: Picaros Funding, Ormond Quay, North Sea Funding

Authorized amounts: e5 billion, e5 billion, e10 billion

Sponsors: KBC Financial Products UK, Sachsen LB Europe, ABN Amro

Dates: June-July 2004

A Moody?s report last month indicated that asset-backed commercial paper (ABCP) volumes in Europe, the Middle East and Africa fell slightly in the second quarter of 2004. The amount of ABCP funded by EMEA conduits fell to $103 billion in April from $106 billion three months before as spreads tightened and competition for AAA rated securities from CDO squared deals and structured investment vehicles rose, although the pipeline remains strong.

A slowdown was overdue. The ABCP market has grown quickly, stretching liquidity lines. ?There have been liquidity issues for three or four years,? says Kevin Ingram, partner at law firm Clifford Chance. ?Internal managers at the banks have realized that ABCP isn?t a capital-free or risk-free product. These programmes are huge.? Concerns that Basle II would increase risk weightings for undrawn liquidity facilities exacerbated these worries.

So sponsors are taking the simple idea of buying long-term assets with short-term funding and creating innovative new deals to fund new assets and tap non-bank sources of liquidity.

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