According to several market sources, Salomon Smith Barney is said to be in the process of starting its own ABCP conduit - distinct from Citibank's well-established conduit business - bringing to the fore the political squabbling often involved in having separately managed conduit and term ABS businesses within the same bank.
Market insiders familiar with the situation, while not shocked, seemed to think it was "a little odd" that Salomon made this decision, especially in light of the bank's recent push to bring the Citi and Salomon franchises closer together. However, sources postulated that since the 1998 merger, Salomon has wanted more control over its own clients and deals, which often must be approved by the conduit side. Neither Salomon nor Citibank returned calls on the subject.
As is the case at several banks that have separately managed conduit and term groups, the conduit business is lower margin than the term business, so the conduit side usually asks for some share of the profits on term deals in exchange for getting involved in a term transaction, sources said. Otherwise, it is not worth it for the conduit business to sink its resources into it.
"Citi does a lot of term business in conduits," said a market source. "They are separate units, so they are judged separately. As in other banks that use that model, conduits support the term business."
At Citi, the ABCP business, run by Citibank's Al Hageman, is separate from the term asset-backed business, which is run by SSB's Bill Grady and George Graham.
When Citibank's securitization operations were merged with Salomon in 1998, rather than having Salomon completely subsume the Citibank operations, the decision was made to keep two separate groups, each with its own niche. Citibank has always had one of the largest presences in the industry for ABCP and conduit programs. Salomon, of course, has the No. 1 term asset-backed team. Considering the respective strength and size of each group, sources say that it was somewhat frustrating for the Salomon side to ask permission for certain clients and transactions.
In the early days after the merger, however, the two divisions interacted harmoniously, recommending deal opportunities to each other when they surfaced, and teaming up on the roadshow circuit to make the case to clients that they can turn to Citigroup for all funding options, including ABCP conduit lending.
But Citibank's conduit business, which often placed unique 12b-1 fee paper and trade receivable deals into its vehicles, sometimes considered commodity ABS term deals low-return, and would need to be compensated in some way. Market sources indicate that the Salomon team wished to set up its own, distinct client base, and thus decided to start its own ABCP conduit.
Apparently, however, this type of infighting is not uncommon in banks that have separately managed ABCP and term groups. "Conduits have their own fee schedules, and the conduit is used to assist the term business," said another source. "In some cases, the conduit is paid below-market fees, but it does it in order to get some future business for the term side."
For an issuer, there are lower rates on the CP conduit side, so sometimes deals are warehoused in a conduit, awaiting a more favorable term execution market. When the term execution climate improves, the company securitizes.
Citi is not the only commercial bank that follows the two-department model; Credit Suisse First Boston also has a conduit side and a term side that report to two different managers. However, many banks have a single, integrated group under the same management, including Deutsche Bank, JP Morgan Chase, ABN Amro and Banc One.
So which model makes more sense? "You have to evaluate the business as the entire client," said one ABS source. "Deals have to make sense as they are related to overall income. But if two separate groups each has to justify its own profits, then they may start butting heads."
As for the new Salomon conduit, observers say several key questions remain: Who is going to administer it? What types of clients do they want to service and what type of assets would go into it? What are the start-up costs?
"This is an interesting situation. I thought it was a little weird that Salomon would do this," said a market source.