NEW YORK - Conduit restructuring was hands-down the hottest topic of last week's ABCP conference, though some market players are concerned that the "secretive" and proprietary nature of the ABCP market could present challenges to an industry that, as a whole, is battling a common issue to all, more so given the rapidly approaching June 30 deadline.
At the same time, others are worried about revealing too much in too broad a forum, such that the Financial Accounting Standards Board perceives a sort of "industry agreed-upon" loophole.
As for how FASB is viewing the ABCP market's restructuring endeavor, "I've heard an awful lot of [proposals], most of them being pretty much above board," said Ron Lott of the FASB, and project manager for FIN 46. Lott said he is regularly receiving e-mails from industry players with questions on FIN 46, but admitted that most of the questions and requests have been too vague. "As far as I know, most of [the bank sponsors] haven't decided what they're going to do yet."
That said, during last week's meeting, FASB indicated its view that QSPEs, under current criteria, can be used (or abused) to circumvent the board's intent with FIN 46 that balance sheets should accurately reflect an entity's risk. The board will consider two paths: either tightening up the QSPE exemption in FIN 46 through an amendment, which would be based on decision-making thresholds, or changing the underlying criteria for FAS 140 QSPEs.
In terms of the latter, FASB will consider a rule stating that if a residual interest holder in an SPE is also providing liquidity support, that SPE cannot be a FAS 140 QSPE, whether or not the residual interest holder is the transferor. It's not clear yet where guarantees fall into this approach, said Marty Rosenblatt, in an informal post-FASB meeting email blast.
FASB is also considering combining the above rule with the revision of any existing literature on QSPEs that are inconsistent with the original spirit of the standard, which is that a QSPE be a passive entity and that the interests in the Q represent indirect interests in the underlying assets.
"This was proposed in recognition of the fact that the desire to convert variable interest entities into Qs has been heightened by the Q exemption provided to both transferors and others in FIN 46," Rosenblatt said.
Lott does not believe that liquidity advancing would encompass servicing advances, a feature widely used in term ABS. In fact, the issue of servicing advances was included in the latest primers to EITF 02-12, before the board assumed the project. Apparently, traditional servicing advancing would only be an issue if there is an implied risk, such that the servicer might not be paid back in full. In the EITF's rendition, if the servicer is permitted to evaluate whether or not there is a risk, and if the servicer can decide not to advance based on this evaluation, the advancing agreement would not be considered liquidity advancing by FASB.
Meanwhile, Lott indicated that if an enterprise made a strong enough case that it could not reasonably meet the June 30 deadline, the board would possibly consider granted an extension.
"If someone were to come with a good argument or strong evidence that says this is not possible to implement [FIN 46], the board would have to listen," Lott said. "However, my view would be that the board would not want there to be any delays."
Outside of concerns that the FASB is looking to plug loopholes, securitization has long been a market of innovation and proprietary technology, so openly sharing restructuring strategies is sensitive stuff, and it's not necessarily characteristic of this market or Wall Street in general, especially from the banking point of view.
Like elsewhere in securitization, the ability to successfully innovate is a key competitive advantage to winning business. At the very least, a bank that successfully restructures will have a significant economic advantage over banks that end up consolidating some or all of their assets.
While industry groups rally, lobby, hold hands and generally band together, it's difficult to imagine any of these players - be it the investment banks, asset managers, rating agencies, law firms or the all-mighty accounting firms, currently the securitization ruling class - to simply open their books or freely share ideas with competitors. No, not on this Street.
Last week's ABCP conference, hosted by the Strategic Research Institute, drew in as many as 300 industry players. While few attendees would expect a unified "silver bullet" approach to FIN 46, some audience members expressed frustration. "There's four months to go and everybody's still saying the same things," one attorney quipped during refreshments. "There's nothing new here. I hope these guys are further along than they let on."
What's more, a veiled, "every man for himself" race to restructure could result in an onslaught of newly tweaked vehicles waiting at the final hour for rating agency approval. According to Moody's Investors Service, the 50 largest multi-seller conduits represent half of the total market, which is currently hovering at $700 billion. Credit checking 50 conduits in four months could be challenging enough, if the agencies were actually given the new structures now (which would be predicated on the notion that these restructurings were ready to be reviewed). What about the other half of that $700 billion? That's a few hundred more, at least.
"Given the potential volume of structural amendments, the more advance notice we have, the better able we will be to respond to issuers' needs," said Deborah Seife, head of ABCP at Fitch Ratings. "Short of that, there could be a significant crunch."
If everybody takes a different approach, she added, the crunch would intensify.
The supply gig
However improbable, buy-siders would likely welcome a more united effort because they are concerned with diminished supply. If ABCP becomes significantly more expensive, the money market funds will be returning less to their investors.
Moreover, investor panelists reaffirmed worries that consolidation could cause name risk, as ABCP programs are generally viewed as a separate risk from the sponsoring bank. If some or all of the assets were brought on to the balance sheet, investors might not be able to make the case that the notes are a separate credit. Any event that leads to a shrinking universe of credits can be detrimental to investors trying to diversify.
While ABCP deals are still closing, the collateral market continues to shrink and/or banks have slowed originations.
"Our pipeline is extraordinarily thin compared to what it's been in the past," said Brad Schwartz, of the conduit group at JPMorgan Securities, during a panel on the "State of the Market."
Schwartz added that in any event, at least temporarily, JPMorgan likely will shrink its ABCP program, and/or be more selective among its client base, cutting out the lower credits.
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