The asset-backed commercial paper industry witnessed the first visible instance of a fraudulent receivables sale, according to market participants, revealed by PNC Bank in its first quarter earnings release.

Apparently, a $50 million trade receivables financing, which PNC Bank sold into its Market Street Funding conduit, was backed by fraudulent receivables.

"Market Street has not had a credit loss since inception in 1995, and this is the first potential loss that we've identified and we've described it as an apparent fraud," said a PNC company spokesman, opting not to elaborate on the transaction details, as that would violate client confidentiality.

While the incident essentially has minimal-to-zero impact on CP investors, it is still noteworthy, market sources said.

"Although it is something of a hit to the business, in the end it's going to prove the strength of the business, that CP programs can withstand this," said one asset-backed researcher.

PNC's mention of the fraud on April 19 sent a ripple through the ABCP market, and spurred immediate ratings confirmations on Market Street from both Standard & Poor's and Moody's Investors Service.

"I've never seen a situation like that, and I think it's a one-off type of situation," said Sam Pilcer, head of ABCP at Moody's. "Because it's fully wrapped, deals like this can be done without prior review from Moody's."

The event drew on a liquidity facility that fully supported the transaction. The deal, which involved an unrated company and closed in 2001, was wrapped by a triple-A multi-line insurance company. Since it was a liquidity draw, it is likely PNC expects to be reimbursed by the credit provider.

"There's never been a draw on program credit enhancement, by any program," Moody's Pilcer added. "That would be a very big issue, if any conduit sponsor ever drew on credit enhancement. They exercised their liquidity instead."

Market Street is authorized to issue more than $6 billion in ABCP, and, as of 3Q01, was backed 38% by trade receivables, 25% student loans, 19% auto loans, 8% equipment, 6% credit cards and 4% other, according to S&P data. Approximately 79% of the collateral is from unrated originators.

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