Asset-backed Commercial Paper (ABCP) is a short-term debt/note issued by a Special Purpose Vehicle (SPV). The notes are backed by various assets such as trade receivables, loan receivables, auto loans, etc. The SPV is generally a bankruptcy remote entity created solely for the purpose of issuing the ABCP. The commercial paper thus sold has a maturity ranging from 90 days to 180 days. It is also referred to as a conduit as its purpose is to collect cash receipts and disburse payments to investors.
The assets backing the ABCP can be long-term in nature which leads to maturity mismatch. The debt of the SPV is paid off at maturity by collection of receivables, reissuance of ABCP or by utilizing the available credit facilities.
The ABCP conduits are rated by one or more rating agencies such as S&P and Moody’s and generally carry a high-quality short-term rating.
ABCP structures have two kinds of support:
- Liquidity facilities: This ensures that the SPV has sufficient cash available to pay the maturing ABCP.
- Program credit enhancement: The credit enhancement is designed to ensure that the the receivables will be sufficient to pay off maturing ABCP. It covers any shortfall in cash flow from any pol of receivables. One way this is done is in the form of overcollateralization.
ABCP can be in the following forms:
- Single-seller conduits: Single seller conduits purchase receivables from only one seller, so they will usually have just one collateral type.
- Multi-seller conduits: These conduits have multiple pools from multiple sellers. A multi-seller conduit can have multiple asset types. The assets in these conduits are also credit enhanced sufficiently to ensure investment-grade rating for the ABCP.
- Securities-arbitrage conduits: These structures seek to benefit from the difference between short-term funding costs and long-term asset returns. They are generally issued by commercial banks or asset managers. These programs have liquidity/enhancement from a highly rated bank to protect the investors from a cash shortfall, or a decline in securities rating.
The following diagram shows the basic structure of a multi-seller ABCP program:
The ABCP programs grew in popularity because of a combination of competitive and regulatory factors affecting the banking industry. They allowed commercial banks to offer their corporate customers low-cost, off-balance sheet funding. At the same time they provided corporations with an alternative to direct debt issuance and term ABS. Finally, since ABCP funding is short-term, the issuer can quickly increase/decrease the amount of funding required based on their needs.