(August 24, 2007) There are signs that the liquidity crisis in third-party asset-backed commercial paper (ABCP) may ease as the company behind the securitized debt has managed to find buyers for its latest issuance.
Coventree Inc., the structured finance company at the center of Canada’s asset-backed commercial paper liquidity crisis, announced it had successfully completed a $169 million new issuance, of which $153 million was moved by investors with bonds that matured during market disruptions over the past two weeks.
During the liquidity crisis, approximately $3.6 billion of non-expandable “A” bonds issued by Coventree-sponsored companies matured. About one sixth of this value was converted into new banknotes by their holders.
The company also announced that all $107 million in expandable “E Notes” that matured today have been rolled over. Coventree shares had gained more than 27% by midday as investors welcomed the news.
“As of today, the depositary has enabled holders of maturing and unpaid A bonds who wished to roll over such A bonds to withdraw the A bonds from the depositary and make a rollover on or after the maturity date of such A bonds,” he added. – the company said in a press release. “Coventree expects that the conversion of existing E-bonds issued by Coventree-sponsored companies into new E-bonds will soon be available to investors who wish to do so.”
Morningstar Canada searched its fund database to determine exposure to asset-backed commercial paper recently placed on watch by Dominion Bond Rating Service. Of the 60 funds with exposure to this asset, only 24 are money market funds.
“So far, from what we’ve heard from several fund managers, it appears to be a liquidity issue rather than a deterioration in credit quality and the underlying assets,” says Philip Lee, a fund analyst at Morningstar Canada. “Not everyone is fully aware of what these things (ABCP) really are, and I think that’s really at the root of the problem.”
Stock and bond funds also use ABCP to hold cash ahead of implementation, but generally these holdings are “negligible,” Lee says, because they represent a small portion of the fund’s total holdings.
“Investors expect a certain level of security when placing their assets in money market funds,” Lee says.
The money market fund with the largest exposure to this commercial paper is National Bank Corporate Cash Management, which has assets of over $288.6 million, representing 37.9% of its total assets of $760.6 million (based on current holdings). .
Natcan Money Market Pooled holds the second largest position with $215.3 million, while the National Bank of Poland Treasury Board and the National Bank of Poland Money Market Fund hold an additional $202 million and $155 million, respectively.
The remaining fund with more than $100 million in ABCP is Legg Mason Western Asset Canadian Money Market with $100.8 million. Desjardin Money Market and IA Clarington Money Market hold $57 million and $51.2 million, respectively.
“Many financial institutions, such as Dundee and National Bank, have said they will provide liquidity to back these securities,” Lee notes. “I wouldn’t suggest that investors are very concerned about the security of these facilities.”
The highest ABCP weight was found in the IA Ultraflex RM Money Market separated fund, amounting to 80.1%. However, the fund is relatively small, with just over $3.8 million in assets and just over $3 million in ABCP.
The only other money market fund with more than 50% of its assets in ABCP was the Genus Money Market fund with 64.9% (or $24.8 million) in ABCP.
Submitted by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com
(24/08/07)
