Fitch Comment on the ABCP Market, Impact of Terrorist Attacks

    NEW YORK--Sept. 21, 2001--In spite of the terrorist attacks that befell the United States last week, the asset-backed commercial paper (ABCP) market persevered and exhibited only minor interruptions.
    In light of these recent events, Fitch reviewed all ABCP programs rated by the firm.
    Fitch's review included an assessment of the administrator's performance during the disruption, the issuer's ability to place CP, and the functionality of accessed liquidity facilities. In addition, Fitch evaluated the sufficiency of emergency off-site locations (if necessary) for the administrator and/or any counterparties, and quantified issuer exposure to commercial mortgage backed securities (CMBS), aircraft loans and leases, multi-line insurers, and automobile rental fleets. Fitch has determined that in all cases, the administrator and all other program counterparties performed as required, all drawn liquidity facilities funded on a same day basis, and the market as a whole weathered the storm. Additionally, exposures to affected industry sectors, as mentioned above, were either nonexistent, or sufficiently small as to not raise any immediate credit concerns. At the present time, Fitch does not anticipate taking any rating action with respect to any ABCP program, but will continue to closely monitor underlying asset performance as market conditions warrant.
    For the ABCP programs that were able to issue on September 11 and 12, CP was placed at wider spreads with investor appetite limited to overnight CP. However, feedback from the ABCP dealer community indicates that ABCP pricing has since come back into line with those prior to Sept. 11 levels. Additionally, more than 75% of the ABCP issuers surveyed by Fitch, who were able to issue CP last week, experienced some difficulty clearing and settling trades as a result of the overall operational distress that impacted the U.S. financial markets. Specifically, certain issuing and paying agents were evacuated and experienced some difficulties establishing their back-up sites and systems. As a result of settlement difficulties, fund transfers may not have reached their intended recipients by scheduled settlement dates and some technical payment defaults may have occurred. However, given the extraordinary circumstances of last week, Fitch does not intend to take any rating actions relating to settlement problems. By week's end, most operational issues were resolved.

    Funding in the Disaster's Wake

    Of the 78 ABCP conduit administrators responsible for the 172 ABCP programs currently rated by Fitch globally, Fitch was able to obtain data from 49 administrators who are collectively responsible for the administration of 125 ABCP programs. While approximately 70% of the surveyed ABCP issuers were able to roll CP on Tuesday, Sept. 11 and Wednesday, Sept. 12, the remaining issuers addressed maturing liabilities on those days via alternate funding approaches. Approximately 18% of surveyed issuers followed the Sept. 12 recommendation of the Bond Market Association that advised that any CP issuance originally scheduled for settlement on Tuesday, Sept. 11 or Wednesday, Sept. 12, and which did not settle, be settled on Thursday Sept. 13. The Bond Market Association's recommendation was akin to treating Tuesday and Wednesday of last week as `non-business days', with issuers being responsible to repay CP on the next succeeding business day, Thursday Sept. 13. Therefore, for issuers who adopted the recommendation, CP with original maturity dates of Tuesday or Wednesday of last week was locked in at the same discount or interest rate as originally issued, but the maturities were extended two or one day(s), respectively.
    As opposed to those ABCP issuers who were able to access the CP market, approximately 12% of surveyed issuers drew on their program's committed (and in some cases uncommitted) liquidity support facilities to repay CP maturing on September 11, 12, and 13. In some instances, issuers were unable to issue CP due to insufficient market liquidity or communication problems stemming from placement agents' close proximity to the World Trade Center, while other issuers drew on liquidity lines simply as a precautionary measure (less than 5% of issuers surveyed). In either case, these facilities worked as intended -- by providing funds to repay maturing liabilities in the event of a market interruption or timing mismatch between a program's assets and liabilities. The effectiveness of these liquidity facilities, an integral structural feature of ABCP programs, sent a reassuring message to the market that even under stressful conditions, ABCP vehicles operated as expected. Moreover, with the U.S. Federal Reserve's immediate injection of liquidity into the capital markets, which provided tremendous support to the capital markets, all liquidity banks were able to honor their funding obligations when called upon.

    Credit Implications

    Fitch has identified a number of collateral and industry sectors, commonly funded through ABCP conduits or utilized in connection with ABCP transactions, that may be stressed as a result of recent events, including aircraft loans and leases, commercial real estate, property and casualty insurance, and automobile rental fleets. This morning, Fitch downgraded Continental Airlines (from `BB' to `B-`).
    Fitch is also closely monitoring developments with respect to commercial real estate transactions with exposures to properties in lower Manhattan that may have been affected by the attacks, specifically Banc of America Large Loan Inc. commercial mortgage pass-through certificates, series 2001-7WTC, GS Mortgage Securities Corporation II, series 2001-LIB (all classes were affirmed on Sept. 18), and GMAC Commercial Mortgage Securities, Inc., Series 2001-WTC.
    With regard to the insurance and reinsurance sectors, Fitch believes that insured losses from these recent events could ultimately prove to be the largest in history. However, it is expected that the vast majority of Fitch rated insurers and reinsurers will be able to absorb any losses without material damage to their financial positions.
    Along with the decline in airline travel, Fitch expects rental car demand to similarly decline over the next several months as the industry experiences a slowdown in business and leisure travel due to recent events. As a result, Fitch anticipates fleet reductions and weaker operating results among the rental car companies. The uncertainty and potential for a prolonged decline in demand, coupled with softening used car prices and continued aggressive rental pricing competition, have created instability within the rental car industry which could have a negative impact on outstanding rental car ABS transactions.
    With respect to all of the aforementioned sectors affected by the recent events, in addition to all Fitch-rated corporate and financial institutions credits, Fitch will continue to closely monitor the affected Fitch-rated transactions and provide updated analysis and/or rating action on a case-by-base basis.
    Please refer to our web site `www.fitchratings.com' for all related corporate and structured finance rating announcements.