At last week's meeting on the consolidation project, the Financial Accounting Standards Board (FASB) re-affirmed some of the positive-for-ABS tentative decisions that came to light when the board met on March 13.
First off, it seems likely the new rules will acknowledge that certain non-qualifying SPE structures, including those characteristic of arbitrage cash CDOs, will not necessarily have a single primary beneficiary. Such deals will not be subject to the proposed 10% outside equity requirement to avoid consolidation.
When the deals are subject to this requirement, the equity investment could be defined as exposure to the subordinated variable returns, and could possibly include non-investment grade notes, according to Marty Rosenblatt, head of the securitization practice at Deloitte & Touche.
Manager incentive fees would not fall under this category, but would rather be categorized as "market-based fees."
Also significant, FASB acknowledged that, in certain cases, "independent economic substance" can be maintained without the full 10% outside equity investment, if the specific "facts and circumstances" support that conclusion.
Possible revision to 140 to address silos
On the ABCP front, the possibility was re-affirmed that the individual financial asset sellers in a multi-seller conduit will likely take the assets back on their books, if they are not able to structure through intermediary QSPEs, as market players have suggested.
However, if the individual sellers were to structure through intermediary QPSEs to avoid consolidation, the conduits would fall under the category of those purchasing senior beneficial interests in multiple QSPEs, which would expose them to a different set of interpretations.
For multi-sellers buying assets from individual QSPEs, FASB is considering a revision to SFAS 140 to address more specifically the treatment of the so-called silo SPEs, to determine if the transferor is the primary beneficiary.
If SFAS 140 is not revised, the conduit administrator could be considered the primary beneficiary, and made to consolidate the conduit.
Securities arbitrage conduits buying ABS will likely be structured to satisfy the 10% equity rule, sources said.
FASB is still working on the revision of SFAS 94, and the exposure draft is expected to be published for commentary no sooner than May. It has not been decided yet if a revision to 140 would be published in tandem with the consolidation project or at a future time.
Facts and information for this update contributed in large by Marty Rosenblatt, head of the securitization practice at Deloitte & Touche, and chair to the Accounting and Tax Subcommittee of the newly established American Securitization Forum.