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September 06, 2019  

Downgrade Weighs on Guggenheim Conduit

Industry participants are questioning the future of a Guggenheim commercial-paper conduit.

At issue is an Aug. 1 action in which S&P cut Nomura’s short-term credit rating to “A-2” (from “A-1”). Because Nomura supplies a liquidity backstop for Guggenheim’s White Plains Capital conduit, the agency followed up with a corresponding downgrade to that vehicle’s securities on Aug. 9.

Pointing to difficulties that conduit operators long have faced in placing anything but top-rated paper, meanwhile, sources say White Plains’ days could be numbered — with one suggesting the entity might shut down in the next few months.

That said, White Plains’ securities still carry an “F1” mark from Fitch. And it appears Guggenheim’s plan for the immediate future is to continue running the vehicle with its existing A-2/F1 grades, while retaining the backstop from Nomura.

How that will work remains to be seen. Buyers of conduit paper typically give the most weight to ratings from Moody’s or S&P, suggesting that Fitch’s mark alone may be insufficient to preserve White Plains’ investor base, sources said. In fact, there are no conduits in operation with P-2/A-2 designations from Moody’s or S&P.

Already, market professionals are describing a scenario in which White Plains’ securities have found less demand from mutual fund operators — the largest group of conduit investors — forcing Guggenheim to rely more heavily on less-active buyers including municipalities and separate-account managers.

White Plains has $572 million of its securities in the hands of investors. That’s down from $700 million at the beginning of this year, although it’s unclear how much of the decline, if any, resulted from the downgrade. Also uncertain is how the downgrade has affected White Plains’ funding costs.

With that in mind, the talk is that is if Guggenheim can’t improve White Plains’ standing, it might redirect asset sellers to its other conduits or bank loans. In addition to White Plains, Guggenheim runs four conduits with $20 billion of paper outstanding. Those vehicles, which receive liquidity support from institutions other than Nomura, are run by Thomas Irvin in Chicago under the umbrella of the company’s treasury services division.

“I can’t see any upside to keeping White Plains going,” one investor said.

White Plains funds a mix of assets in including auto loans and repurchase agreements for clients, mostly in the U.S.

A similar situation unfolded for Deutsche Bank in 2014, when a Moody’s downgrade of the bank led to corresponding actions for eight of its conduits. With demand for their paper dwindling, Deutsche wound up shuttering several of those vehicles while steering clients toward other financing mechanisms, including loans.

This isn’t the first time White Plains has run into to liquidity-related difficulties. Guggenheim had to delay the conduit’s 2013 launch when S&P downgraded its original liquidity supplier, RBS — a move that resulted in the arrangement with Nomura.

Nomura’s downgrade reflected a lack of progress in efforts by chief executive Koji Nagai to reverse some $1 billion of losses.