Sparked by corporate demand and easier capital requirements, foreign banks are piling into the booming market for asset-backed commercial paper.
Holland's ABN Amro Bank and France's Societe Generale plan to enter the market soon, and Union Bank of Switzerland is adding two more programs to the two it already has.
Banks with up-and-running programs include France's Credit Lyonnais, Germany's Deutsche Bank, Britain's Barclays Bank and National Westminster Bank PLC, Industrial Bank of Japan, Japan's Sumitomo Bank, and Canadian Imperial Bank of Commerce.
"It makes sense for foreign banks to get into the business here," said one foreign banker. "Most of the expertise is in the U.S."
A Win-Win Situation
In these programs, a bank sets up a high-rated special-purpose corporation that issues commercial paper backed by receivables purchased from corporations.
The programs offer most corporations cheaper funding than would be available through either a traditional bank loan or a securities offering.
The special-purpose corporation is backed by bank lines or other forms of credit enhancement. This enables the special unit to get a higher credit rating, and hence cheaper funding, than a company could get on its own.
For the banks, the programs generate substantial fee income, require less capital than straightforward lending, and offer a higher return than traditional bank financing.
"Our earnings from this business have grown from zero to a fairly nice number," said James Carson, managing director for asset securitization at Canadian Imperial.
The market, created in 1983, has expanded rapidly. Fitch Investors Service said that 175 programs are in operation, representing $75 billion in outstanding commercial paper and $150 billion in commitments.
Participants in the market estimated that asset-backed programs now make up 10% of the commercial paper market.
Although foreign banks make up a small portion of the market, individual programs are sizable. The typical size is $1 billion. Canadian Imperial's is $5 billion.
Bankers and analysts say there is ample room for foreign banks.
"It's a growing area, and we expect more programs," said Doug Murray of Fitch.
Easy treatment under international capital guidelines remains a major motivating force for banks.
"Asset-backed commercial paper programs generate high returns on assets and are not capital intensive," said Douglas Renfield-Miller, first vice president in the asset securitization section at Union Bank of Switzerland.
Banks issue letters of credit, or other types of guarantees, for only a portion of the total commercial paper issued by the program.
On a $1 billion program, for example, a bank might issue a letter of credit equal to only 10% of the total amount.
Assuming the international capital standard of 8% of assets, $8 million in capital would have to be set aside.
In contrast, if the bank made a $1 billion loan, it would have to set aside $80 million in capital.
"Pricing for credit has deteriorated, and the Bank for International Setttlements capital rules make no distinction between lending to a triple-A company and a hot dog stand," said Joseph Rizzi, vice president for structured finance at ABN Amro in Chicago.
The programs permit banks to use their capital more efficiently, he said.
Bankers and analysts say foreign banks are also being pushed into asset securitization by demand from corporate customers.
"Instead of being viewed as some exotic sort of product, a lot of banks are starting to feel this is something you have to be able to offer your clients," said Claire Robinson, an analyst with Moody's Investors Service.
Foreign bankers say they hope to transplant the expertise they gained back home.
"ABN Amro wants to do asset securitization on a global basis," said Peter Casey, the bank's executive vice president in charge of U.S. operations. Paper PushersUpcoming asset-backed commercial paperProgram Size Sponsoring Bank(s)Windmill $1 ABN AmroFunding bil.Renaissance $1 SocieteAsset bil. General andFunding Chemical BankMonte Rosa NA Union Bank ofCapital SwitzerlandMonte Blanc NA Union Bank ofCapital SwitzerlandSources: Asset Sales Reports, banks