Pending implementation of Basel II in Europe and an unwavering confidence in the mortgage market marked substantial changes to two ABCP conduits in recent weeks.
Landesbank Berlin has restructured Check Point Charlie, the ABCP program that it sponsors, allowing the conduit to appeal to investors outside the U.S. and to diversify its source of funds. The move is also timed to allow the bank to take advantage of Basel II Accord rules, which go into effect January 2007 in Europe. Meanwhile, in case anyone suspects housing market jitters might sideline liquidity for the market, Calyon added a $200 million residential MBS deal to its La Fayette ABCP program, and restructured it to include expanded eligibility requirements for mortgage loans. That deal comprised of prime mortgages, putting it far away from looming troubles in the subprime and HEL sectors.
Launched in 1997, Check Point Charlie invests in dollar-denominated structured securities, including term ABS, RMBS and CDOs, Arjun Matthai, a director in Landesbank Berlin's treasury and trading division, said. Check Point Charlie is Landesbank Berlin's only sponsored ABCP conduit at the moment, and the bank had its hands full.
The newly restructured conduit will be able to begin issuing European commercial paper, extendable notes and X-notes. Extendible notes issued from Check Point Charlie will have expected maturity dates of up to 180 days for U.S. commercial paper, and 185 days for European commercial paper. Final maturity dates will be up to 270 days and 365 days from issuance for commercial paper issued in the U.S. and Europe respectively. X-notes bear a floating rate of interest from the time of issuance. Their initial expected maturity date falls nine months from issuance for U.S. commercial paper and 12 months for European commercial paper, according to Moody's Investors Service, which affirmed the program's P-1 rating.
The bank also amended the terms of Check Point Charlie's credit enhancement, to make the portfolio-specific credit enhancement dynamic enough to reflect changes in its assets' credit quality over time. Credit enhancement will also be calculated so that senior loans from the program will carry an Aa2' rating from Moody's and AA' from Fitch Ratings before the conduit issues any commercial paper.
Furthermore, the bank will base its liquidity support for outstanding CP on rating forecasts from Moody's' CDOROM and Fitch's Vector CDO model, tools that help users model credit risk, and which the rating agencies typically use to assess CDO transactions. Essentially, the program cannot issue commercial paper unless the available credit enhancement, in respect of the senior loans from Check Point Charlie to each purchasing company, can achieve a CDOROM rating forecast of at least Aa2' and a Vector rating forecast of AA'.
These changes, specifically, will allow Landesbank Berlin to reduce the amount of capital it needs to hold against Check Point Charlie's liquidity and credit enhancement facilities when Basel II comes into effect in Europe. The accord attempts to make the current Basel rules more credit sensitive to banks' credit risks, rather than maintaining more universal, constricting standards.
The bank will also incorporate a committed repurchase agreement with Landesbank Hessen - Thuringen as a repo buyer.
The conduit has a program limit of $5 billion, and although Landesbank Berlin declined to raise its limit this time around, it can do so easily further down the road, Matthai said. Currently, the program has $2 billion of asset-backed commercial paper outstanding.
As for Calyon's La Fayette Asset Securitization, the partially supported, multiseller program will replace its SPV structure with a repurchase agreement, one of the more significant changes to the program. Formerly, ABCP conduits purchased mortgages through SPVs, because bankruptcy rules did not clarify whether repos would provide adequate security interest for investors in the conduits. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 broadened the types of securities that can qualify as collateral in repo agreements.
Now, eligible securities include mortgage loans and mortgage-related securities as well as certain bankers' acceptances. Aside from adding the mortgage deal, obtained through a large U.S. home builder, La Fayette also expanded the criteria for the mortgage loans that it purchases, allowing it to better align itself with the residential mortgage market.
Apparently, La Fayette is not alone in its vote of confidence in the mortgage market. All of the current ABCP conduits participating in the program, including ABN Amro's Amsterdam Funding Corp.; JPMorgan's Park Avenue Receivables Co.; and Societe General's Barton Capital either maintained or increased their commitments to the program.
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