During last Wednesday's Financial Accounting Standards Board meeting, the staff decided to not object to three of the five FIN 46-related FASB staff positions (FSPs), to approve another, and to reconsider or potentially revise the remaining FSP, which addresses fees paid to decision makers and guarantee providers in a variable interest entity, in calculating the expected loss and expected residual returns.
On Thursday, FASB posted the first five staff positions on its Web site. A source at FASB would not comment on the nature of the revisions to the remaining FSP - or if there will be revisions - other than to confirm that the issue concerning fees had not been finalized and that the Board was still considering the comments it had received.
In the January release of FIN 46, FASB indicated that these fees would be used in the determination of the expected residual return. In its FSP on the topic, the board emphasized that the ERR need only be calculated if no single party owns the majority of the expected loss.
However, if no one party held the majority of the expected loss, than the parties to the VIE needed to consider the ERR, which, according to the proposed FSP, does incorporate fees in its calculation.
Shortly after the release of FIN 46, market players were commenting on the possibility of a CDO collateral manager being deemed the majority ERR holder, even if that manager held little or no equity in the CDO.
While we're on the topic...
Of the pre 10-Q announcements addressing FIN 46, Bank One Corp. executives stated in an investor conference call (and later in a follow-up 8-K filing), that Bank One will indeed be consolidating $40 billion in assets and liabilities associated with it ABCP businesses.
During the conference call, bank Chairman and CEO James Dimon said, "Current expectations are of no impact to Tier One capital... Our capital numbers are so strong they barely dent it." Bank One's consolidated assets will appear in the commercial banking line of business in future reporting.
Meanwhile, Huntington Bancshares expects to consolidate about $1 billion in auto loans securitized in 2000, the company indicated in an investor presentation. Huntington will record an $18 million pretax one-time charge ($12 million after tax), equating to roughly five cents a share, while its common equity-to-assets ratio will decrease by 30 basis points. The company will maintain its long-term target common equity-to-assets ratio of 7.00%. Huntington will establish a loan loss reserve of 1.01% associated with the loans it brings on balance sheet. "The addition of these loans at a 1.01% loan loss rate will reduce our overall loan loss reserve ratio by about four basis points in the third quarter," the company said in an 8-K with the SEC.
Next, Ryder Systems noted in an investor presentation that it would consolidate $256 million in assets and liabilities associated with securitizations, in adhering with FIN 46. On a slide entitled "Balance Sheet Impact of Consolidating VIEs," Ryder noted that its total on-balance sheet debt-to-equity will rise to 161% from 126% pre-consolidation.
DaimlerChrysler will consolidate roughly E600 million associated with off-balance sheet leasing facilities. The company also mentioned its receivables sales to ABCP conduits - currently at about E5.7 billion - which it does not intend to consolidate, as it is not the primary beneficiary. Daimler states that its maximum loss exposure to these receivables is E1 billion, which represents the company's retained interest.
Additionally, several air carriers are reporting FIN 46-related asset/liability consolidations (and un-consolidations), some tied to aircraft lease facilities. For example, Federal Express may be adding $140 million to its balance sheet, while Continental Airlines could be removing a $248 million subsidiary VIE in which it is not the primary beneficiary.
Volume dipping toward end-of-month
In its weekly ABCP commentary, Credit Suisse First Boston noted that the market had slowed from the initial push that occurred following the end of the quarter.
"Investor appetite seems to be focused on shorter maturities inside of three months because the curve offers no incentive to extend," the bank comments. "If issuers want to issue longer-dated paper, they almost certainly have to concede some spread. The good news on this front is that they would only need to give up a little in order to raise a large amount, as long as there was no negative sentiment on the horizon."
Outstanding ABCP volume fell for the second consecutive week, according to last Wednesday's weekly figures from the Federal Reserve. Outstandings declined to $732.8 billion from $737.7 billion the week before, following an early quarter surge to $742.3 billion.
In the most recent roundup from Moody's Investors Service, the rating agency notes that Citibank's Eureka Securitisation plc has issued a subordinated note, presumably in line with several conduits Citibank has restructured to avoid consolidation under FIN 46. Moody's confirmed its ratings on both Eureka's commercial paper and A2' rated mezzanine notes.