If MTNWeek had created an award for the CP sector most likely to succeed in 2001, the asset-backed (ABCP) market would have won hands down. When the pitches were being made for Best Euro-CP House in February this year, many of the dealing houses said ABCP would be one of the biggest growth areas. Unfortunately, a slower market than was expected has tempered their enthusiasm, and the question now is whether the European conduits are serving their investors well enough to keep them interested. Outstandings in the European ABCP market have grown from $18.29 billion on December 31 2000 to $25.72 billion on July 25 2001 according to CPWare, a growth of over 40%. It would seem there is nothing to get too worried about. But Barry Gartner, head of Euro-CP at Barclays Capital, thinks this will not increase any further. He says: "There has been a reasonable increase in the volume of ABCP outstandings since last year, but I don't think the level we have now will be too different at the end of this year." Many dealers think the potential of the market is not being realized, especially when you have the US market as a comparison. Louise Mason is head of Euro-CP at Credit Suisse First Boston (CSFB), and she thinks the US ABCP market is too strong a competitor. She says: "The fundamental problem is that the US CP market is still providing better funding levels and much greater liquidity than the Euro-CP market, a problem which is exacerbated by the underlying assets of these conduits being US dollar denominated." The price differential between the two markets is so great that sometimes even issuers with euro-denominated assets can find it cheaper to go to the US market and then do the currency swap. One dealer tells of an issuer he knows pulling out of the European market altogether to focus on the US. Siemens, the German electronics and engineering company, signed a euro10 billion ($8.80 billion) multi-currency ABCP programme in December 2000 under the name Siefunds Corporation. So far it has only tapped the US market. Damien Hart, treasurer at Siemens, says: "The US market is more accessible, bigger, and issuers know they can go there and get funds quickly. This feeling is slightly lacking in Europe, and even if you need euro funds I have heard that it can still work out cheaper if you go to the US and do the swap back." European investors will find this disappointing. Without a variety of active issuers to choose from, demand for paper may dwindle. Mason, at CSFB, says: "The lack of a consistent approach to Euro-CP issuance does not help pricing or liquidity. Issuers have to be willing to give the European market a reasonable trial over a few months to see what it can really offer." Jonathan Curry, cash strategist at Barclays Global Investors, backed up Mason's point at Euromoney's first Annual CP Conference in March, when he said: "In the ABCP market we really only go for the well-established names. It's consistency we want." But Europe is growing, and highly-rated conduits have done well off the back of the credit migration of many big corporates. Every dealer and issuer sees it as a market that just needs to find a rhythm. There have been three ABCP programme signings this year according to CPWare, but one trader says he knows of five others that have signed in the last few weeks. One of this year's signings came from CDC IXIS Capital Markets, (CDC) when it signed a euro5 billion multi-currency ABCP programme under the name Altitude Funding in May. It did its first trade two weeks ago, and Karine Delpech, CP funding at CDC, says: "We made our first issue in Europe very recently and got exactly the price that we wanted. We will do another euro500 million this year, and next year will look to fund euro1.5 billion." But Delpech adds that she hopes some of this will come from the US market. Things are changing in Europe to make trading easier. In June JPMorgan became the first IPA to use Issuelink to help speed up settlement. Euroclear announced the launch of a similar system two weeks later (see MTNWeek, issue 235). And certain regulations that inhibit Euro-CP trading are being revised. Gartner, at Barclays Capital, says: "From the legal viewpoint Europe is not a homogenous entity, but in the last few years some countries have changed their legal requirements to make securitization easier." It is the least that needs to happen if Europe is to become as attractive to issuers and investors as the US. The US ABCP market has about $650 billion outstanding, and this means much greater liquidity exists there than in the $26 billion European market. The see-sawing of the two markets will continue, but dealers are optimistic that the differences will be less pronounced. Hart, at Siemens, thinks the European dealing community has to take some responsibility. He says: "We are relying too much on US dealing houses to be the driving force in Europe." CSFB and Barclays are two houses trying to redress this imbalance. Mason, at CSFB, says: "Investors want to see evidence that issuers are going to be active in the market. We see the best growth opportunities in the ABCP market this year coming from European banks with euro-denominated assets." And Gartner, at Barclays Capital, says: "Barclays will continue to be heavily involved in ABCP. We see this as a sector of the market which is set to grow strongly over the next few years."
July 27, 2001
