A Guggenheim subsidiary sought to reassure investors that it remains a viable issuer of short-term financing known as commercial paper as regulators and federal prosecutors continue to probe the company’s founder Mark Walter.
Guggenheim Treasury Services “is not a target of the investigations and continues to operate business as usual,” the company said in a message to investors seen by Bloomberg. “GTS has a 30-year operating history, having issued and repaid over $12 trillion of commercial paper.”
Guggenheim’s commercial paper issuers operate “as bankruptcy-remote entities, which are not owned by any of the targeted entities under investigation,” according to the Aug. 20 message. “In the unlikely event that GTS does not perform its managerial duties,” the company said, it would appoint an independent agent to repay its obligations.
The notice came as some investors have looked to buy only shorter-term commercial paper from Guggenheim, while a smaller portion of backers have paused trading the firm’s products, according to people familiar with the matter. One banking partner that used Guggenheim as a conduit to raise funds for its own operations has routed about $150 million to a rival firm, said one of the people, all of whom asked not to be identified discussing non-public information.
The developments don’t necessarily signal a financial squeeze at GTS or a threat to holders of its commercial paper, and trading remains routine in the overall market. But it’s another potential pain point in Mark Walter’s financial empire as US authorities investigate potential improprieties at two of his insurance companies and at Guggenheim Partners.
“Our business continues to operate as normal, with outstanding commercial paper amounts unchanged in recent weeks,” a spokesperson for Guggenheim Treasury Services said in a statement. “Investors understand that the structure and risk profile of our commercial paper are unimpacted by recent news.”
TWG Global, the holding company at the center of Walter’s empire, said last week it’s working with federal officials to resolve their inquiries, and that no investors have been harmed.
“We’re reaching out to dealers, to sponsors to ensure what we think we know is the right information,” said Deborah Cunningham, Federated Hermes’ chief investment officer for global liquidity markets, which is a buyer of commercial paper. “We’ve gotten no questions from shareholders, but when and if they ask a question about it we want to have the information.”
Unsecured, Short-Term
Commercial paper is unsecured, short-term debt issued by corporations, financial institutions and foreign entities to meet immediate funding needs. Maturities range from overnight to 270 days, with most issued for one to six months.
Money-market funds were once the dominant buyers, but today account for only about 20% of the market, with the rest held by banks, corporates and other cash investors.
Within that market, Guggenheim Treasury Services operates asset-backed commercial paper conduits — structures that issue short-term notes backed by secured loans. Unlike during the financial crisis, a majority of such paper is now usually backed by repurchase agreements rather than pools of receivables. Such entities have long been used by major banks and finance companies to raise short-term funding.
“Repayment of commercial paper is not dependent on the performance of GTS or Guggenheim more broadly,” Guggenheim said in its note to clients. “Transactions with highly rated banks provide liquidity backstops to ensure full and timely repayment of commercial paper.”
Total outstanding asset-backed commercial paper reached $508 billion at the end of July. While that was the highest level since 2009, it’s still far off the peak it reached in 2007. Guggenheim, for its part, has grown to become one of the largest non-bank players in the market — it ranks as the eighth-largest issuer of such paper to money-market funds.
Here’s how it works: When a bank needs short-term, balance-sheet-friendly financing to support trading activity — often in fixed-income markets — it can borrow from an asset-backed commercial paper conduit.
The conduits raise cash from money-market funds and other institutional investors by issuing commercial paper. Banks borrow that money and use it to finance securities inventories and other trading-related activities.
“There’s been a proliferation of these types of conduits in the last two to three years and the investor base is spoiled for choice,” said David Callahan, head of cash solutions at Lombard Odier Investment Managers in Geneva, who helps oversee €11.5 billion and declined to comment specifically on Guggenheim. “It no longer really has any downside to pull up your stakes and look elsewhere because there’s an abundance of these types of conduits. That may be a headwind for providers facing increased scrutiny.”
Issuance picked up in May and June — a period that coincided with rising demand for equity financing as asset managers built record long futures positions and exchange-traded funds increased their use of leverage, JPMorgan Chase & Co. strategists wrote in July.
Post-crisis capital rules designed to keep banks out of trouble have made certain types of short-term financing more expensive for them to provide directly, so conduits offer a way to do that while still getting more favorable capital and accounting treatment.
That’s made Guggenheim and non-bank rivals like Nearwater Capital, Northcross Capital, BSN Capital and Capitolis important players in the plumbing behind modern trading activity across asset classes.
“ABCP is designed with bells and whistles,” Cunningham said. “It’s contracts linking together the bank, sponsor, buyers. They’re irrevocable airtight structures so when there are market disruptions those underlying programs themselves can continue.”