Compared to year 2000, when the asset-backed commercial paper market celebrated the innovative restructuring of Eureka Securitization, there was little in the way of "novel" structures for most of this year, although a new wave of innovation is anticipated.

As preview of what's to come, this month is seeing two ABCP conduits structured largely to act as swap counterparties, securing portfolios of assets so that the banking entities can receive favorable regulatory treatment. Last week's launch of Hudson-American Realty Protection (HARP) by Bayerische Hypo-Und Veriensbank (HVB), and another similar transaction scheduled to launch this week, are examples of this new trend taking shape, said Sam Pilcer, head of ABCP at Moody's Investors Service.

"There should be some interesting structures in 2002, with respect to regulatory issues," Pilcer said. "The regulatory issues are going to become more pronounced, and there's going to be more and more pressure to do something about it."

HVB is using HARP to reduce the risk associated with a portfolio of commercial mortgages it originates on a revolving basis as a lender. One way for the bank to score favorable regulatory treatment for these mortgages is to enter into a credit default swap with a qualifying, bankruptcy-remote entity.

Through structural enhancements, HARP is able to provide credit protection to the commercial mortgages. The conduit is issuing subordinated notes, and will use the proceeds of those notes and the ABCP to invest in a high quality portfolio of assets, held as collateral for the credit default swap. The cashflow from those assets, combined with the payments for the credit protection, will be used to pay interest on commercial paper and the subordinated term notes.

If there is credit deterioration or payment shortfalls in the portfolio of commercial mortgages, HARP will liquidate a corresponding amount of its collateral assets to compensate. HARP can issue up to $2 billion in ABCP. HVB is providing a $400 million credit facility, and MBIA is wrapping the commercial paper issued by HARP.

Voluminous 2001

Outstanding ABCP inched over the $700 billion mark for the first time in November, and now accounts for just over 50% of the entire CP market, according to the Federal Reserve.

Last year at this time, ABCP accounted for roughly 40% of the CP market, which has been averaging about $1.420 trillion for the last few months, down from a three month average of about $1.59 trillion at the close of 2000.

In the last few weeks, the ABCP market has been flooded with transactions, as is generally the case near year-end, as banks cleanse their balance sheets. Into the New Year transaction flow should be sustained, but growth for 2002 will not likely be astronomical.

"I still expect growth, but perhaps at a somewhat more moderate pace," said Deborah Seife, head of the ABCP group at Fitch.

As for highlights this year, the ABCP market saw one of the largest co-purchase facilities, this one notably backed by the bankruptcy liquidation of Finova Corp. That deal, led solely by Fleet Boston, involved famed investor Warren Buffet and his company Bershire Hathaway, which partnered with Lucadia National Corp to form Berkadia, with the specific purpose to fund Finova out of bankruptcy (see ASR 8/6/01).

The $6 billion loan was funded by nearly 20 participating conduits, which will be paid as the estate is liquidated; the value has been estimated at as much as $11 billion. Bershire Hathaway provided a triple-A wrap on the deal.

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