In a settlement with Canadian and U.S. regulators, including the Securities and Exchange Commission, Canadian Imperial Bank of Commerce (CIBC) will be precluded for the next three years from using its ABCP conduits to finance "off-balance sheet" assets for its clients.
The settlement is tied to none other than evildoer extraordinaire Enron Corp., which was able to tangle up a hosts of its risks and liabilities though complex structures allegedly enabled, in part, by CIBC and its structured finance businesses.
CIBC currently has about $8 billion in available lines via its U.S. conduits, plus its two European based conduits, Great Lakes Capital Funding Corp. and Superior Capital Funding Corp. It's also understood that CIBC has some ongoing structured finance business lines in Australia.
The announcement from CIBC came shortly before Christmas, as which point both Fitch Ratings and Moody's Investors Service aired votes of confidence in the structural integrity of the two frozen U.S. conduits: Asset Securitization Cooperative Corp. (ASCC) and Special Purpose Accounts Receivables Corp. (SPARC). The two agencies will continue to monitor the vehicles while they amortize.
Last Tuesday Moody's also affirmed Great Lakes and Superior.
Since CIBC can no longer renew these facilities with its clients, several sources speculate one of two possibilities exist: Either the conduits are sold in their entirety to another bank, or the sellers are picked up piecemeal by other multi-seller vehicles.
Coincidental or not, the suspension of this business for CIBC is timely to the recent departures from the firm's ABCP group, as reported in various financial publications. The conduits are currently run by David Allen and David Duncan, sources said. CIBC has been winding down its structured finance business over the last year and a half, following the departure of former group head Kenneth Wormser.
It's unclear at this point whether other banks involved with Enron will be subject to similar temporary restrictions to participate in segments of structured finance, though the CIBC settlement came later than those from other banks. As part of its settlement, CIBC will fork over $80 million to the SEC.
A year of transition?
CIBC's departure - whether in totality or temporary - marks one of several other fallen market leaders in ABCP.
Because of deteriorating credit ratings on the banking side, ABCP innovator HypoVereinsbank may substantially pair down its ABCP and ABS business going forward, according to sources (see story p. 8). HVB's former securitization group head Tom Glynn resigned from the bank as of year-end.
Other banks that participate in the ABCP market have undergone recent turmoil, though hardly in the same realm as CIBC. ABN Amro, though visibly ramping up its term business, recently lost its two conduit chiefs. One industry source says this type of situation is fairly typical of a bank realigning itself strategically and building new synergies.
Globally, ABN runs half a dozen conduits, including Amsterdam Funding Corp. and Windmill Funding Corp. in the U.S., and its largest conduit, Amstel Funding, out of Europe. Altogether, at the end of August, ABN had about $46 billion in ABCP and E7.5 billion in ECP outstanding, according to Moody's ABCP Query.
Meanwhile - news or not - DZ Bank's Ken Brandt, head of the firm's ABCP business, is on an extended leave of absence for personal reasons, and is expected to return to his post by mid-year. Calls to DZ for clarification went unanswered as of press time.
Volume's ups and downs
Save a final push of volume in the last few days of December trading - unlikely though possible nonetheless - outstanding ABCP will end 2003 at around $715 billion, down from $753 billion the same period in 2002, when the market saw a year-end spike.
At press time, the Federal Reserve was reporting that $655 billion in ABCP was scheduled to mature in 2004, which represented 92% of outstandings (the total just shy of $712 billion). This marks the second consecutive year-over-year December decline and, perhaps more noteworthy, marks the first November-to-December decrease in outstandings since the Fed began tracking the ABCP market in 1993, should the final numbers near the Fed's estimates.
December had historically been a month of balance sheet cleansing for year-end filers, though this motivation seems to have gone
the way of the dinosaur, at least
in 2003.
Despite an arguably dreary year for volume, most market players are taking a bullish stance for 2004, hoping the improving economy will bolster demand for funding. That, combined with more certainty on the accounting and regulatory front (the industry seems to have hosed down the FASB dragon with the expected loss tranche), could help ease concerns for the sponsoring institutions (see story p. 4).
Mortgage conduits
The most noted positive trend during 2003 was likely the return of the single-single conduit, the establishment of which seemed to balance out the plethora of program terminations.
This was the first real push of single-sellers since the late 1990s, when it became clear that most corporations could finance more cheaply through multi-seller conduits, avoiding the administrative costs of running their own programs.
Most, if not all, of the developments on this front have been from mortgage originators taking advantage of a cheaper cost of warehousing through extendible note conduits, versus revolving bank facilities or multi-seller conduits, which require more liquidity support. The extendible note structure allows for a lower liquidity charge against the assets. The largest of these came from prolific term issuer Countrywide Home Loans, which launched Park Granada in April.
Most recently, GMAC Commercial Mortgage launched CRE-8, a warehousing ABCP conduit for commercial mortgages, servicing advances, student loans and other assets. The conduit is administered by GMAC, with Deutsche Bank Trust Company as indenture trustee and collateral agent. Credit Lyonnais is providing a market value swap, which guarantees the liquidation value of a determined portion of CRE-8's portfolio.
CRE-8 can issue notes up to 90 days, extendible to 270, for a maximum maturity of 360 days, according to a write-up from Moody's.
Also this year, Ameriquest Mortgage, New Century Mortgage and Friedman Billings Ramsey Group launched single-seller mortgage conduits, all with unique bells and whistles. Friedman's Georgetown Funding - backed by highly liquid agency collateral - acts, among other things, as a cheap form of repo financing for Friedman (see ASR 12/1, p. 21).
As for the slowdown in mortgage origination, these conduits will likely shrink in size, rather than terminate. "It's still an effect way to finance these types of assets," said one ABCP trader. "They are not going anywhere anytime soon."
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