At last week's session on the consolidation project, the Financial Accounting Standards Board (FASB) acknowledged that, for certain types of special purpose entities, a primary beneficiary may not be identifiable, which introduces another potential out for types of CDOs and other securitization vehicles that don't fall under the QSPE exemption, sources said.

"They acknowledged that there might be some circumstances where there is not a single primary beneficiary that can be easily identified," said Jim Mountain, a partner at accounting firm Deloitte & Touche. "They didn't say exactly what would happen in that circumstance, but I think the inference was that you need to have a single primary beneficiary at least for an identifiable silo within an SPE in order to have a consolidation."

For example, a cash arbitrage CDO might have several parties involved with it at different points of its evolution, including the investment bank that places the equity and warehouses the assets prior to close, the several investors with various slices of the equity, the note holders, and the collateral manager that might have little or no investment in the equity. A single-primary beneficiary in this scenario is clearly more difficult to identify than, say, a non-QSPE balance sheet CLO where all the assets came off the balance sheet of the transferor, and the transferor is collateral manager and owner of a majority of the equity tranche.

FASB did not offer qualitative or quantitative guidelines for this consideration, although it's expected that the board will offer more specific determining factors in its exposure draft, which could be released in April for commentary.

"I think they are going to work hard to try to offer broad guidance as much as possible to facilitate identification of a single-primary beneficiary," Deloitte's Mountain said.

10% equity under fire

During a conference call last week hosted by Maureen Coen of Credit Suisse First Boston's ABCP group, speaker Jason Kravitt, a securitization attorney and partner at Mayer, Brown Rowe & Maw argued that the 10% outside equity requirement is not an objective intellectual standard and does not necessarily address the intention of the rule.

One standard that FASB has continually referred to in pegging the required equity investment is that there needs to be enough outside equity to ensure that the SPE can finance itself without support from a putative primary beneficiary.

"If that test makes any sense, there should be no 10% minimum," Kravitt argued. "It should be whatever percent is necessary for the rating agencies to rate the transaction, and for the capital markets to buy the security. That's really the amount of equity that enables the conduit to be a stand-alone entity. It should be a substantive test, not a 10% test."

Another question raised by Kravitt: Will FASB continue to require the third party interest to be strictly in the form of equity?

"To prevent against the abuse they have in mind, there's no necessity to make it equity," Kravitt said. "Even if they stick with 10%, as long as you have a third party own 10% you should be able to have 2% equity, 6% mezzanine, and even 2% investment grade, as long as those were the bottom three tranches of the transaction... To me that seems to be a substantive argument that makes a lot of sense, but the question is, Will FASB be persuaded by it?' That would, by the way, eliminate the threat to CDOs in large part."

ABCP still on the block

In ABCP land, FASB reaffirmed its inclination to include basic conduit transactions, such as a conduit that is the lessor of property to multiple lessees or the buyer of financial assets from multiple transferors, in the scope of the project.

Accountants speculate FASB will rule that such vehicles, which include multi-seller ABCP conduits, should be broken into individual conduits or mini-silos for accounting purposes, and then have each of the primary beneficiaries consolidate their shares. One solution accountants have toyed around with would be to structure the conduit as a QSPE something more likely possible for single-sellers. For multi-sellers, industry players have suggested the possibility of placing a QSPE between the asset seller and the conduit.

On the CSFB conference call, a discussion ensued over whether a QSPE that stands between a seller and a conduit would maintain its QSPE status if it had to consolidate a portion of the conduit's assets into QSPE. "Would that preserve the QSPE?" asked a participant from a corporation that runs a large single-seller conduit.

Carol Histelberger, also a speaker and partner at Mayer Brown, responded to the effect that losing the QSPE status would be an inappropriate result as it would unfairly disadvantage QSPEs that access the capital markets through commercial paper issues versus those that access the term markets.

"[Some of these challenges] are in the fact that say they're not changing 140, but they come up with a test that has a very complicated interplay with 140, we're not yet sure what they mean," Kravitt stated. "The boundary between 140 and the test they've come up with is susceptible to several different interpretations. There's no one necessary manner in which to define that boundary."

Deloitte & Touche's Marty Rosenblatt, a participant listening in, commented to Kravitt and Hitselberger that if they would like to consider a sea-change career change, he would welcome them with open arms. They made Rosenblatt the same offer.

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