NEW YORK - Not surprisingly, accounting uncertainty was the de facto theme of last week's Third Annual Forum on ABCP Liquidity & SIVs, hosted by the Strategic Research Institute. Roughly 150 ABCP market participants gathered to mingle, express concerns and suggest solutions to issues facing the market.
Conference chairperson Maureen Coen, who heads the ABCP origination group at Credit Suisse First Boston, noted that the market has tackled a new set of challenges each year: from Y2K, to bank consolidation, to disappearing liquidity. Current challenges include credit concerns, capital rules, depressed supply, and the uncertainties associated with the Financial Accounting Standards Board (FASB) project on consolidation.
To be sure, Day two, which featured a session specifically dedicated to the exposure draft, drew a larger crowd than the opening ceremonies; although, it was heard that a number of attendees probably missed the first morning so as not to miss President Bush's address on accounting practices and corporate citizenship. Who ever heard of accounting issues holding up the flow in ABCP land?
As ASR reported last week, the ABCP market has hit several speed bumps over the past year, including exposure to ailing rental car companies and telecoms, late redemptions, and other hurdles that, in total, industry leaders like to view as illustrations of the market's strength, as investors have yet to lose a dime. "Events have shown that what we do works," said Everett Rutan of Moody's Investors Service, during a credit perspective panel at the conference.
Interestingly, one of the reasons the ABCP market enjoys an impeccable credit record - in that credit enhancement has yet to be drawn upon - is that sponsors have been quick to fund any problems out of their conduits. Whether these problems were perceived or real, the theme of this "implied recourse" surfaced a few times last week, particularly in regards to the pending changes to accounting rules.
So far, it has been important for sponsors to project "deep pockets and commitment to the business," said Jim McDonald of Banco Satander Hispano. "[However,] if every time you get a little glitch you fund it out, how can you argue that you're running on an arm's length basis."
Going forward, it's possible that the market will see troubled assets staying in the conduits a little longer, McDonald suggested.
Though outstandings are down and pipelines have slowed, not everyone is blaming FASB. There are other fairly standard explanations, such as record low interest rates and depressed economic activity.
Mark Hirshorn of HypoVereinsbank pointed out that in the current environment, where corporates are assuming a defensive posture, many transactions are only partially utilized. Sellers are setting them up to hedge against a liquidity crunch.
Exposing the draft
"The FSPE concept, to my understanding, came out of the examination of the multi-seller conduit [as a vehicle of risk diversification], so it would be ironic if these were made to be consolidated onto the sponsor," one panelist said during the opening panel on Tuesday morning.
In a nutshell, one of the chief concerns with the draft is its elusiveness, which, according to session moderator Jason Kravitt of Mayer Brown Rowe & Maw, signifies that the board members have yet to come to consensus on several of the issues. The ambiguity in several key areas of the draft allows each member, perhaps, to interpret according to his/her own views.
What's ironic, noted Ann Kenyon of Deloitte & Touche, is that if not for the political climate, the accounting industry might welcome the general language and absence of "bright line" tests, as such guidelines lend themselves to varying interpretations. With accounting practices and abuses currently in the country's spotlight, "Our clients really want this to be bulletproof," Kenyon said.
As for the notorious paragraph 17 (printed in its entirety last week), Kravitt believes that FASB has the following intentions with silos: the approach only applies to transferors, never administrators, and if the silo can satisfy as a QSPE, the seller is off the hook, or else goes through the FSPE tests (paragraphs 22 and 23) - which is another shot at avoiding consolidation.
Regardless of whether or not the seller is able to avoid consolidation, the administrator will also have to conduct an analysis, which makes for the potential of a "double consolidation," some argue.
Apparently, one of the biggest challenges is going to be structuring fees so that they can be considered market-based. Currently, administrators essentially take what's left over: the sort of "residual" created by the funding/liability arbitrage, even though an outside party generally owns the equity. The reason it's difficult to call the administrator's fee "market-based" is that it fluctuates with the profitability of the conduit, and is not simply a fee for services at a going rate.
During the session, Sam Pilcer, head of the ABCP group at Moody's, offered up the following preliminary analysis of how the various conduit types may be impacted, should the final guidelines closely resemble the draft.
*Loan-backed CP conduits are "dinosaurs," Pilcer said. To the extent that there's any left by the end of the year, they'll most likely be consolidated.
*Administrators of multi-seller conduits will go through (or restructure to benefit from) the FSPE analysis, while the sellers will try for QSPEs. It's possible there may be a double consolidation, since the draft is not clear on this point. Sellers may not be concerned with consolidation, but banks will be, as off-balance-sheet treatment could be a primary goal.
*Single sellers will try to restructure for QSPE status, if they're not already.
*Credit arbitrage conduits will also try for QSPE status. These could likely be re-documented to satisfy QSPE criteria (pending EITF 02-12). There are already a few securities arbitrage conduits that are set up as QSPEs.
*SIVs will try for the substantive SPE analysis (depending largely on whether capital notes can be counted as equity), or else will go through the primary beneficiary analysis.
Meanwhile, according to Kravitt, the industry will be lobbying the bank regulators to exude some favorable influence for the market. The regulators would theoretically aim to preserve the capital ratio and cost of funding advantages achieved through ABCP.
In essence, noted another panelist, regulators might agree that a large-scale consolidation ($700 billion?) and all the associated impacts would not be a favorable development.