ABCP Where do we go from here

ABCP : Where do we go from here? Sophie Berthelon, Moody’s Investors Service Peter Eisenhardt, Bank of America Jonathan Curry, Barclays Global Investors Rob Koning, ABN Amro 1

What’s happened? u Since the middle of July, the ABCP market – after reaching $1. 5 trillion in global outstandings and representing almost half of the world’s CP markets – has experienced unprecedented retrenchment and been a focus of the financial markets u Triggered by the U. S. sub-prime mortgage market difficulties and knock on effects throughout credit markets, certain ABCP programs and structures came under stress u Conservative short term investors – concerned with capital preservation more than returns and cautious about potential investor withdrawals from their funds given negative and sometimes inaccurate press – pulled away from ABCP l Scrutiny of short term fund holdings of CDO CP traunches and ABS contributed to defensive investing 2

Uncertainty in ABCP has been part of a wider dislocation in credit and money markets u Interbank to lend l spreads to underlying rates widened as banks became reluctant Banks have been uncertain as to what demands on their balance sheets might be and what exposures to bad credits might be at other banks u It has been difficult to place CP in an environment where at times it has been difficult to price even one month LIBOR l The chart below compares the front 3 -month Eurodollar future with 3 month LIBOR l Normally, the futures contract trades at a discount (no positive carry) until it converges with LIBOR at maturity, but given defensive lending the reverse has been true 3

ABCP spreads over LIBOR gapped out while maturities shortened u In programs funding securities, ABCP costs exceeded asset yields and challenged some programs u Traditional multi-seller programs generally passed increased funding costs on to clients whose assets were being funded u Post-Fed rate cut, spreads have tightened considerably 4

Global ABCP outstandings have fallen steadily since the end of July to $1. 099 u On 3 October, ABECP outstandings were $193 bn (-35%) while US ABCP was $906 bn (23%) l Part of the reason that ABECP has dropped by a higher percentage than US ABCP is that European investors are less likely to buy short (1 -7 day) paper that is now more prevalent u There are 20 ABECP programs with outstandings over $3 bn, down from 31 at the end of July 5

Positives u In September – a month of heavy maturities - conservative short term investors received their money on maturing paper as they reassessed u Issuers are paying off maturing paper by selling and rolling off assets, bringing assets back to sponsor balance sheets, drawing liquidity, and entering into repos u Identifiable, highly likely investor losses are limited so far u Money funds have not seen investor redemptions; on the contrary assets have increased with falling rates Ø U. S. money fund assets hit an all-time high of $2. 8 trillion u Investors are beginning to re-engage ABCP and are differentiating between programs they are comfortable with and those that need further review u Investors will confirm the structures they want to buy, work with issuers to “re-calibrate” others, and maybe reject a few altogether u Traditional multi-sellers with full liquidity support from strong sponsor banks are now trading towards June levels 6

Programme mix might change in the future 7

Programme mix might change in the future 8

Liquidity u Liquidity backing will be important when investors assess ABCP programs going forward, as there must be means to repay paper if it cannot be rolled u Investors l l l will re-focus on the institution(s) providing liquidity and whether the size of the commitment is appropriate for these institution(s) confirming that there are no easy “outs” to providing liquidity extendible features by which the issuer can extend the maturity of the paper Ø the $150 bn+ extendible market that developed in the U. S. saw paper extend although investors had viewed this as never likely u If program liquidity is less than 100%, repayment must also come from sale of assets and/or capital. On “Market Value” structures, investors will re-scrutinise asset l Type l Concentrations l Valuations and program leverage and funding 9

Transparency ``I think there are some investors not doing the work and relying on ratings. If you're willing to do the work, it's there. '' - money fund investor u Some have suggested that insufficient information and lack of transparency in ABCP and conduit structures are the main elements in recent events affecting the market - this is not the case u Portfolio l l l managers and credit teams have access to information memorandums rating agency reports conduit-issued “pool reports”, which broadly describe current assets and verify compliance with program requirements u Frequent and regular conferences are hosted by the industry and rating agencies, often at no cost to investors l Issuers have always been keen to meet investors to answer questions 10

Transparency (con’t. ) u However, transparency can always be improved l Issuers, rating agencies, and dealers are keen to help in any way possible l Some investors may conclude their approval of ABCP was too ratingsbased Ø the market will work to help these investors perform the necessary analysis l Parties not previously focused on ABCP, such as investors in money funds, will be provided with information and education as required 11

ABCP has a purpose and a future! u ABCP l l l issuers benefit from capital efficiency regulatory relief diversified funding u Structured Investment Vehicles (assets down from over $380 bn to under $360 bn) and securities arbitrage conduits are important buyers of ABS and other term product u Investors l l benefit from wider product offering competitive returns credits with a defined purpose and strategy that can be analysed steady supply u The global implementation of Basel II will be more important than ever 12