Although outstandings in the asset-backed commercial paper market have grown to well over $650 billion, even the largest transactions generally pass by unnoticed due to the true-private nature of the conduit marketplace.
However, a most unusual and creative financing surfaced last week, when sole agent Fleet Securities began placing sizeable chunks of Berkadia's $6 billion bailout loan to Finova Capital into the asset-backed commercial paper market.
Berkadia is the joint entity formed by Warren Buffet's Berkshire Hathaway and Lucadia National Corp., for the specific purpose of funding Finova out of bankruptcy. Berkadia managed to outbid GE Capital Corp. and Goldman Sachs in mid-June, providing ailing Finova, which had filed for Chapter 11 in March, with the $6 billion loan plus "cash on hand," giving Finova a $7.35 billion cash injection.
The loan will be used to pay off the existing creditors, which are primarily bondholders and banks. According to published reports, creditors will receive 70% of their claims in cash, plus newly issued eight-year senior debt paying 7.5% per annum.
After the restructuring, it is understood that Berkadia will begin liquidating Finova, estimating that its assets are worth as much as $12 billion. The excess will serve as overcollateralization on the sale to the conduits.
"Essentially it's a liquidation play," one industry source said. "I don't believe anyone is expecting Finova to keep operating. I don't think there's any revolving financing being proposed to Finova."
For the ABCP market, which has seen increased use this year by corporate entities seeking working capital, this transaction is quite unusual, said Sam Pilcer, head of ABCP at Moody's Investors Service.
"It's unusual to see ABCP used to finance the purchase of a pool of assets out of bankruptcy," Pilcer said. "It's unusual to ABCP associated with bankruptcy in any way."
The conduit transaction is structured as a co-purchase securitization facility enhanced by a triple-A guarantee from Berkshire.
For Fleet, the deal represents a joint effort between the firm's loan syndicate group and its asset securitization group, said John Molloy, managing director and head of Fleet's ABS effort.
According to sources, Bank Boston, which merged with Fleet Bank in 1999, had a long-standing relationship with Berkshire Hathaway, which probably contributed to Fleet's landing the deal.
FleetBoston chose to structure the transaction as a securitization because of the deal size, the asset coverage, and the triple-A guarantee.
"We felt the execution would be more efficient going to the conduit market," Molloy said.
In the two week time frame from the launch to the commitment deadline, Fleet was able to get the deal oversubscribed.
Industry sources said that Fleet's Eagle Funding is likely taking a large piece of the deal. In total, the deal is being bought by about 16 different institutions (conduits), taking pieces between $200 million and $500 million in size.
The deal is also unique in its size. "There have been a few conduit deals in that size range, but not too many," Moody's Pilcer said. "It's definitely nontraditional."
GE Capital's Edison Securitization Corp. is said to have bought a private-label credit card portfolio in the $7.5 billion range, although sources at GE declined to provide further details. Edison, at $30 billion in authorized capacity, is the largest conduit in the market. - MG/DG