Commercial paper

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Do you want the good news or the bad news first? The good news is that market players might be able to stabilise the Canadian asset backed commercial paper (ABCP) market, a key source of short-term funding for investment grade companies and asset managers. A chunk of that small market, some $33bn of asset backed vehicles not sponsored by banks, has been frozen by a buyers’ strike.

It now looks as though ABCP investors, issuers and other key participants such as banks are trying something bold: to shift the commercial paper into floating rate longer-term notes. If it works, it would be the shot in the arm the bedraggled commercial paper market needs. But it is risky. It requires everybody to accept some pain and risk: banks would have to agree not to make margin calls, investors would have to take the new debt, vehicles issuing the paper would have to cease accumulating assets. None of this is straightforward. Investors such as money market funds, for instance, may not be able to hold such a big chunk of long-term paper. But if the plan fails, the crisis in confidence would be really horrible.

Now for the bad news. It is hard to see the Canadian example translating into the US, where the total ABCP market is some $1,000bn and was rocked further on Thursday by Countrywide drawing down its $11.5bn credit facility with banks. It would be tough to squeeze major US market participants into a room to hammer out a deal if confidence deteriorates any further. Meanwhile, the market turmoil is lumping together subprime mortgages with prime mortgages. For the banks, it is yet another potential pressure on their capital positions.

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