Last week National City Financial said in its earnings statement that it had consolidated approximately $2.6 billion in assets onto its balance sheet as a precursor to a planned wind-down of its North Coast Funding ABCP conduit in the fourth quarter.
"When we set up this structure a couple years ago, it was intended to hold high quality investment securities as well as certain loan assets from third parties," said Jeffrey D. Kelly, chief financial officer, during an investor conference call. "The volume of third party business never materialized to our expectations, and that, combined with the general negative perception of special purpose entities today, led to our decision to unwind it."
North Coast was established in September 2000, and, as of 2Q02, had approximately $3.2 billion in average CP outstanding, according to Moody's Investors Service. Nat City recorded a $16 million charge when it brought the conduit assets onto its balance sheet. The charge was primarily associated with a downgraded ABS bond (triple-A to double-A in 3Q02) which lowered the market value of its consolidated assets versus liabilities. In all, the bank brought about $2 billion in securities and $700 million in commercial loans back onto its books.
As previously re-ported in ASR, some institutions, such as FleetBoston Financial Corp., have disclaimed in financial statements with the Securities & Exchange Commission that they may be forced to consolidate conduit assets as a result of accounting guideline changes associated with the Financial Accounting Standards Board SPE consolidation project. Fleet, for example, indicated it might have to consolidate as much as $6 billion (see ASR 9/9/02).
Nat City said its decision to consolidate the SPE was precipitated by amendments to the governing documents. While Nat City did not explicitly identify uncertainty in the pending FASB-related consolidation guidelines, researchers interpreted this to be the case at some level. For example, in commentary last week on Nat City's earnings, analysts at Friedman Billings Ramsey associated the consolidation of the conduit with the FASB debate and its potential impact on ABCP.
Year-end boon?
As the final stretch of the year approaches, ABCP outstandings may pull off a period of sustained growth, particularly as the fourth quarter ends, when volume typically spikes as banks cleanse their balance sheets. This assumes that the potential FASB changes do not completely remove this motivation from the picture.
Outstanding ABCP increased mildly in September, up to $713 billion, the second consecutive month of increasing volume. ABCP outstanding is currently $21
billion ahead of last September's numbers. This is a substantial dip in growth, however, as outstandings last September were nearly $100 billion over the previous year.
According to rating agency sources, there has been sustained deal activity as well as two to three new programs, scheduled to be up and running by year-end. A large single-seller program is said to be in the works by an industrial company that frequently utilizes ABCP via multi-seller conduits, and is also an issuer of term ABS.
Meanwhile, on the international front, Fitch Ratings notes in its current ABCP Paper Trail that Australia is experiencing continued growth in its asset-backed CP market. A Bank of America Australian subsidiary, BA Securities Australia, recently launched Oceania Funding Trust, a new conduit with an initial funding capacity of A$1.5 billion.
"Asset backed CP issuance has continued to grow in the last 12 months, currently accounting for 60% of the total Australian CP market compared to 5% five years ago," said Natasha Vojvodic, of Fitch's Australian ABCP group. "This growth is due to a variety of reasons including the knock on effect from RMBS and mortgage warehouse growth, conduits becoming the major buyers of credit wrapped bond deals and CP investors looking to ABCP rather than corporate CP due to the many corporate downgrades."
