Moody's Investors Service says in a new report today that its ratings outlook for Australian asset-backed commercial paper ("ABCP") in 2010 is stable. This is despite the decline of Australian ABCP issuance in 2009 as conduit sponsors and originators continued to feel the effects of the global economic downturn.

According to the report, by the end of 2009 total outstanding stood at A$23.66b, a 38.73% decline from the previous year, even though several term securitisation transactions took place in H2 2009.

"Moody's ratings outlook for 2010 is expected to be stable due to stable asset performance and the structural protections present in the conduits. However, as Moody's outlook for the bank ratings remains negative, there is downside risk to ABCP conduit ratings should any negative short-term rating actions on the banks take place," says Jennifer Wu, a Moody's VP/Senior Analyst and author of the report.

"Funding spreads became less volatile in 2009 though overnight issuance also materially decreased. As residential mortgage loans are the main assets funded by conduits, investors were concerned by the impact of negative rating action on mortgage insurers on loans. Therefore, conduit sponsors have restructured and enhanced their conduits to mitigate any exposure of their conduits to mortgage insurer ratings," says Wu.

Since the Australian government's implementation of guarantees for the deposits and wholesale funding of authorized deposit-taking institutions, some conduit sponsors have focused their funding sources on government-guaranteed bonds. Some major bank conduits have also kept their conduits dormant until funding conditions for ABCP become more favourable.

The implementation of the Basel II framework, underway since 1 January 2009, has encouraged many bank conduit sponsors to take advantage of the more favourable capital treatment of highly-rated securities. They have actively restructured the assets in their conduits into mortgage back securities to be funded on their balance sheets; this has led to further reductions in issuances in 2009.

Moreover, the decline reflects the impact of the global downturn on conduit sponsors and originators. As residential mortgage loans remain the main assets funded by conduits, the tightening of credit criteria by the conduit sponsors, increased competition from the major Australian banks led to reductions in origination volume by the borrowers.