In a first, Lehman Brothers is acting as an administrator on an asset-backed commercial paper program. More accustomed to acting as a dealer for programs administered by others, the investment bank recently launched Aegis Finance, a partially supported and single-seller vehicle that will issue as much as $2.1 billion in secured liquidity notes (SLNs).

Lehman Brothers is thoroughly acquainted with the $1 trillion asset-backed commercial paper market, having worked as a dealer on such programs as Thornburg Mortgage Capital Resources and KKR Pacific Funding Trust. Indeed, Moody's Investors Service ranked the investment bank as the top ABCP dealer for 4Q05. For that period, the bank oversaw 155 programs totaling $595.5 billion in ABCP outstanding, according to the rating agency.

Also, the bank administers its own internal commercial paper program. Aegis Finance, however, represents the bank's first foray into ABCP territory as a program administrator, a position that some say might set it up to compete against some of its own clients in the ABCP market.

The SLNs from Aegis Finance will pre-fund a portion of its high-grade portfolio of committed, unfounded loans to corporate borrowers with high-grade credit. The SLNs themselves mature within 90 days, and some have final maturity dates of 330 days. The notes will be allowed to purchase short-term assets which fall under prior review, including commercial paper, reverse repurchase agreements and money market funds, according to Moody's. Lehman can increase the program limit to $2.5 billion.

"They know what's going on," said Jonathan Polansky, a managing director at Moody's Investors Service. "They are a large player as a dealer."

Lehman Brothers means business with Aegis Finance. Insurance giant Lloyd's TSB Bank has agreed to give Aegis Finance a swingline facility, an arrangement that turned out to be the program's linchpin. If the SLNs cannot be repaid on their expected maturity dates, Aegis can extend the maturity to their final date of 330 days from initial issuance. If the SLNs fall short at the very last maturity date, Aegis may draw from the liquidity facility and the Lloyd's swingline to repay the maturing notes, plus a stepped-up rate of 25 basis points over Libor. That agreement garnered Aegis Finance its P-1 rating from Moody's. Any downgrade in Lloyd's TSB Bank's credit will trigger a downgrade in Aegis Finance, and if the insurer fails to keep any of its credit enhancement commitments to Aegis, the program will wind down.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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