The global ABCP market has been gobbling up more product than ever from the CIS and Turkish emerging markets. Only two conduits, Panterra Funding and Orchid Funding Corp., have a tight focus on this world, but plenty of other international conduits have taken at least a smattering of EM structured paper.
Many bankers remain dubious that conduit funding for originators - especially sellers keen to have their assets warehoused - makes more economic or strategic sense than on-balance-sheet funding. Still, new EM-centered conduits are on the way, according to sources.
"The number of EM ABCP will go up," said Alberto Santos, senior director at Fitch Ratings. "There will be launches this year, based on the number of proposals we've received."
Nor is this confined to the traditional currencies used for global CPs. Panterra, administered by Citicorp North America, and Orchid, administered by ABN Amro, issue standard dollar CP, but more local-currency emerging market conduits are expected to pop up in the future. A couple of Mexican industry sources said that at least one peso CP conduit was in the works, administered by Deutsche Bank. Meanwhile, South Africa already has several ABCP conduits working the rand market.
A Deutsche spokeswoman said the bank couldn't comment on the rumored Mexican conduit.
Whether or not conduit financing for EM originators ever truly takes off, the activities of Orchid and Panterra have not gone unnoticed. A primer on their mechanics could hint at the form and content of future like-minded conduits.
Orchid Blooms in EMMEA
ABN established Orchid in 2002 as a vehicle for the bank's East Asian clients. At the program's inception, ABN had identified a number of nonbank originators with portfolios between $100 million and $150 million that could use warehousing, said Gary Watmore, ABN's head of asset securitization.
For a few years, the vehicle kept mostly to East Asia, but last year, ABN amended the documents for Orchid to expand the scope of its investments. "We decided we wanted a global EM platform," Watmore said. Since the change, the conduit has snapped up Turkish paper and has also warehoused assets for CIS countries.
As of May 2007, roughly half of Orchid's assets were from the region encompassing Emerging Europe, CIS and Turkey, according to Sara Repucci, director at Fitch Ratings, which has Orchid at F1.' Only a year earlier, Taiwan accounted for well over half the assets, according to a report by Moody's Investors Service, which rates Orchid Prime-1.' Casting a wider net has diluted the share of East Asian assets in the program, which as of May had $2.27 billion in outstanding CP.
Assets from newer regions could be dropped in, as well. "I think we'll see a broad geographic mix," Watmore said. "We'll continue to work with CIS [originators] and more from the Middle East. There's a large opportunity with consumer finance assets."
Orchid is part of a two-tier vehicle. It funds asset purchases by OASIS, a Cayman-islands vehicle, also administered by ABN. The enhancement, liquidity support, and hedging all take place at the OASIS level. OASIS issues a note backed by a portfolio, and Orchid purchases that note. "The intermediate SPV helps ensure that assets are isolated from the originator so they can't be clawed back," Repucci said. OASIS is supported by transaction-specific credit enhancement and programwide enhancement; the latter is provided by ABN and has a floor of the greater of $300 million or 8% of the purchased assets, other than those explicitly rated at least A/F1' by Fitch. In its report, Moody's states that it has no rating requirement on the acquired assets, but that each portfolio is evaluated prior to its funding.
ABN provides liquidity that covers 102% of each series of performing assets behind the CP. The liquidity support can be syndicated out and is available in either U.S. dollars or local currency.
The local currency support speaks to an interesting facet of Orchid - it's used to fund assets that are denominated in emerging-market currencies as well as dollars. Currency hedging, then, is also part of the structure. OASIS enters into swaps to correct the mismatches between local currency assets and the CP's dollar funding. While the conduit's documents do not require that ABN be the only hedge provider, in practice it has been, according to Repucci.
Panterra Pounces on
Panterra Funding is a good deal younger than Orchid but hit a growth spurt earlier this year. Established in July 2006, the program currently has $2.6 billion of outstanding paper backed by roughly 20 transactions. "It picked up a lot of activity in the first quarter," said Fitch's Santos.
"They have funded assets from emerging markets, though they may fund other types of assets subject to Moody's review," said June George, vice president at Moody's. The majority of deals, in fact, have been from emerging markets, and within that category, the bulk are financial future flows - namely, diversified payment rights, sources said.
In contrast to Orchid, Panterra doesn't hold local currency paper or raw assets, sources said.
A Citibank spokeswoman didn't return calls for comment on the program.
Panterra has three layers of credit enhancement. The first layer consists of any variety of enhancements for each transaction. The second layer comes from deeply subordinated debt. The third layer is a letter of credit provided by Citibank in an amount equal to 8% of outstanding CP. Fitch and Moody's rate Panterra F1' and Prime-1,' respectively. Exempt from the LOC requirement are deals wrapped by an insurer rated AA-' or higher by Fitch and Aa3' or higher by Moody's.
On the liquidity front, Citi provides support that's both transaction-specific and programwide. "Citibank is a unique sponsor," Fitch's Santos said. "It's one of the few conduits in town that will provide, in addition to transaction-specific liquidity, liquidity on the program level."
Panterra differs from Orchid in that there are explicit minimum requirements for the ratings of the countries where the sellers are domiciled. Sources said this could be a function of an internal credit requirement particular to Citi. For future-flow receivables, sellers must reside in countries whose cross-border sovereign debt is rated at least Ba3' by Moody's and BB-' Fitch, with a cap of 20% of the maximum program limit for originators in countries rated at least B3' and B-,' respectively.
While Panterra and Orchid are the only global conduits centered on emerging markets, bonds from the region have been sunk into more general conduits. Unsurprisingly, some of that paper has been wrapped. ING Bank's Mont Blanc Capital Corp. is understood to have snapped up a handful of insured Turkish DPR paper that the sponsor itself has arranged. Meanwhile, existing assets are landing in conduits as well. HVB's Arabella has funded a Czech consumer-loan portfolio, according to a Moody's report, and all or part of a recent Russian auto loan deal from ZAO Raiffeissenbank Austria reportedly ended up in a JPMorgan conduit.
A JPMorgan official didn't answer a request for comment.
It remains to be seen whether future conduits in EM will look more like the Panterra of today - taking finished product and relying more on the proven track record of the future-flows class - or Orchid, which in part is managed as an intermediate step for issuers before they hit the capital markets.
Warehousing clearly has a great deal of potential, as originators from CIS and Mexico grow their portfolios by leaps and bounds, but there's skepticism that ABCP conduits are the best route. Regulatory capital requirements are among the factors that play a role in funding decisions, and they could dissuade a bank from on-balance-sheet lending. But sources pointed out that the capital charge isn't necessarily much steeper on a balance-sheet facility than on an ABCP. "Depending on the level of support provided under the liquidity facilities, and depending on the how the conduit is structured, you could still attract a capital charge under Basel II," said Andrea Quirk, director at Standard & Poor's.
For ABN, the Orchid conduit has a strategic advantage. "It's not just a question of the capital charge," Watmore said. "It's a vehicle to maintain a lending relationship, and to put the systems in place to develop a term deal."
At least one competing banker said that balance-sheet funding can impose the same kind of discipline on an issuer looking eventually to visit the market.
Still, Panterra and Orchid are likely to see others like them this year, sources said.
And some originators with booming portfolios see conduits as a good alternative. Victor Kisselev, deputy head of debt finance at Russia's Vneshtorgbank, is a case in point. "We are just looking at opportunities to fund our mortgages via European ABCP conduits," Kisselev said.
The debate over balance-sheet funding versus ABCP conduits obviously doesn't tell the whole story. Alternative forms of funding could emerge for EM assets. One banker said that a way forward might be a form of consortium financing that would enable market investors to take the risk of EM asset pools more directly than is offered in current conduits. "I can see there's a demand for a structure that would handle those growing portfolios," he said.
Already out there is a public warehousing facility for Russian mortgages set up recently by Greenwich Financial Services. The vehicle will aggregate loans, then issue RMBS. Especially with longer-term assets, such as mortgages, the duration mismatch between the underlying assets and the paper in a traditional ABCP can be more trouble than it's worth, sources said.
For those sticking to the ABCP idea, enhancements will remain crucial. Passing through more of the risk to the final investor by accepting a lower rating isn't much of an option. "There has never been much of an ABCP market below the first tier - Prime-1' - due largely to regulatory restrictions," said Moody's senior vice president Everett Rutan. "A conduit looking to fund in the U.S. would probably need a Prime-1' rating or equivalent."
While Standard & Poor's doesn't rate Panterra or Orchid, it has worked out an approach to evaluating EM assets into ABCP conduits. "For an A-1'-rated conduit, the assets coming in need to be at least a long-term A' rating," S&P's Quirk said. "For deals coming from a country where the foreign currency risk is triple-B, a number of factors need to be mitigated, such as transfer and convertibility risk or risk of sovereign interference. Mitigants such as swaps, PRI or other mechanisms need to be introduced to the structure."
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