There are signs that the liquidity crunch for third-party asset-backed commercial paper(ABCP)may be easing, as the company behind the securitized debt has managed to find buyers for its latest issuance.
Coventree Inc., the structured finance firm at the centre of the Canadian liquidity crunch in asset-backed commercial paper, has announced that it has managed to place $169 million of new issuance, with $153 million of that total being rolled over by investors holding notes that matured during the market disruption of the past two weeks.
During the liquidity crunch, about $3.6 billion of non-extensible “A notes” issued by Coventree-sponsored conduits have matured. About one-sixth of that value has been rolled over into new notes by their holders.
The company also announced that all of the $107 million in extensible “E notes,” which matured today, were rolled over. Coventree stock gained more than 27% by mid-morning, as investors welcomed the news.
“Beginning today, the depositary allowed holders of matured and unpaid A notes who wished to roll over such A notes, to withdraw the A notes from the depositary and effect a roll-over on or following the maturity date of those A notes,” the company said in a press release. “Coventree expects that roll-overs of existing E notes issued by Coventree-sponsored conduits into new E notes will be available shortly for investors who wish to do so.”
Morningstar Canada has combed through its fund database to determine the exposure to the asset-backed commercial paper that has recently been placed on watch by Dominion Bond Rating Service. Of the 60 funds with exposure to this asset, only 24 are money market funds.
“Thus far, from what we’ve heard from several money managers, it does seem to be a liquidity concern, rather than deterioration in the credit quality and the underlying assets,” says Philip Lee, 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.”
Equity funds or bond funds also use ABCP to park cash prior to deployment, but generally these holdings are “immaterial,” Lee says, as they make up such a small portion of the fund’s overall holdings.
“Investors expect a certain level of security when they are put into money market funds,” says Lee.
The money market fund with the single largest exposure to this commercial paper is National Bank Corporate Cash Management, which holds over $288.6 million worth, or 37.9% of its total assets of $760.6 million(as of the most current holdings dates).
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Natcan Money Market Pooled holds the second largest position, at $215.3 million, while National Bank Treasury Management and National Bank 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, like Dundee and National Bank, have come out and said they are going to provide liquidity to backstop these securities,” Lee points out. “I wouldn’t suggest that investors be terribly worried about the safety of these.”
The heaviest weighting of ABCP was found in a segregated fund, IA Ultraflex R-M Money Market, at 80.1%. The fund is relatively small, however, with assets of just over $3.8 million, 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.
Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com .