Bank of America last week launched Yorktown Funding, a multi-seller ABCP conduit structured to address consolidation criteria set by the Financial Accounting Standards Board in its Financial Interpretation No. 46 (FIN 46). This is believed to be the first conduit structured specifically with the new accounting rules in mind.
Officials at BofA declined to comment on the structure presently, but anticipate releasing a formal statement in the next week or so. Meanwhile, Moody's Investors Service and Standard & Poor's both roughly described Yorktown in their rating announcements, to which BofA officials alluded.
According to the Moody's release, Yorktown will use the proceeds from issuing ABCP to purchase beneficial interests from YC SUSI in the form of individual "series" of "Special Units of Siloed Interests," or SUSIs. Each series will be based on an asset, or pool of assets, that are acquired from the seller.
Said one source familiar with the structure, "This conduit was created for BofA clients who don't mind having (the assets) on their balance sheets."
Presumably, the structure, which was initially going to be named Midway Funding, somehow allows the individual sellers to be deemed the consolidators of their own pools.
The Yorktown conduit benefits from program-level credit enhancement from BofA, as well as seller-specific liquidity and enhancement facilities, according to Moody's. Yorktown is approved to issue up to $18 billion, and will likely absorb assets currently financed in other BofA conduits, including Kitty Hawk Funding.
Expected loss tranche
As the June 30 deadline to "restructure or consolidate" nears, there's still talk of the expected loss tranche strategy, where a third-party investor would purchase a first loss exposure large enough to absorb the conduit's expected loss, as defined by FASB.
"We've seen an uptick in new conduit proposals, but as to whether or not their targeting FIN 46, it's hard to say," said Tom Fritz of S&P, adding sarcastically, "After all, we've have over a month to go."
While the deadline looms, the pending temporary regulatory capital relief from the bank regulators has taken some of the urgency off the effort, sources said (see ASR 5/12/03).
"I don't think that the June 30/July 1 deadline is as meaningful as it was," said John Geisler, partner at Brera Capital Partners, a private equity firm positioning itself as an investor in expected loss tranches. Though no deals have closed, Geisler anticipates transactions will be completed during the fourth quarter.
According to Geisler, Brera has specialized in the financial services and insurance industries, so working on a solution for ABCP conduits dealing with FIN 46 was a natural progression for the firm. Geisler believes that incorporating a third-party investor into the ABCP model is an evolution of the market consistent with FASB's intention, though he doesn't believe that the day-to-day activities of the administrators will change substantially.
Meanwhile, according to industry sources, several organizations - including the American Securitization Forum - decided not to submit commentary on the FIN 46 FASB staff positions, concluding that, for the most part, there were no surprises in the positions and they were consistent with FIN 46. The deadline was last Monday, May 26.