A New Flavor of ABCP
Reflecting back on the 20 years since Capital Advisors Group was founded, I am amused by the numerous security types that have been created for corporate treasurers and short-term cash portfolios. These new security types, and our ensuing risk evaluation of these securities, have been part of the challenge and excitement that has fed our passion over the last two decades.
The early ‘90s brought us Range, Ratchet and Inverse floaters (many AAA-rated). Then Auction Rate and asset-backed securities joined in the creative parade. Some of these securities were stellar credits, while others were like troubled children with some even continuing to act up in their teenage years (ARS Research). All may have been appropriate for the right investor, but each required deep analysis on our part to determine whether they were appropriate for our clients. The credit crisis has certainly shortened the list of security types that we track, as many have fallen out of favor, but with the current recovery underway, the cooks are back in the kitchen tweaking old recipes. Therefore we are also back at it again, reviewing new structures as they emerge.
Traditionally, security engineers have been deliberate in structuring short-term debt to fit within 2a-7 guidelines, as well as existing investment policies, in order to target the largest possible market. Given the interpretative nature of Rule 2a-7, security underwriters often work together with the legal and credit teams of money market funds to mix and bake new securities, ensuring that they will be accepted by the money fund community. Recently, one of these new security types, which in essence is a new flavor of ABCP called collateralized commercial paper, has worked its way into several money market funds.
In this month’s research spotlight, we examine how these securities are structured relative to their more traditional cousins and track their adoption into short-term corporate portfolios and money market funds.
Best Regards,
Ben Campbell
President & CEO
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