The structure of liquidity facilities that are used to cover asset-backed commercial paper issues has been brought to the fore over the past few months as more and more issuers are finding it very difficult to fund their ABCP programmes. Until recently, it had always been assumed that liquidity facilities would not need to be drawn upon, and consequently they were seen as more of a backstop than as a priority component of commercial paper issuance.
But the credit crunch has changed everything. Although issuance has returned in the ABCP market, no one is labouring any more under the illusion that liquidity facilities have no chance of being drawn upon.
Liquidity provision in the ABCP market always covers 100% of the outstanding paper but there is a difference between providing liquidity and providing credit support, a distinction that has not always been recognized by CP investors. Many liquidity facilities are only in place to meet the risk of being unable to roll commercial paper, rather than any longer-term risks. Many were designed this way because it was always assumed that any problems arising in the ABCP market would be short-term.
In the old days, as many are already calling the markets of just a few months ago, ABCP was repaid from the proceeds of further issuance of ABCP.