This week, ABCP market participants will gather at New York's Marriott Marquis for the 6th Annual Forum on Asset-Backed Commercial Paper, hosted by the Strategic Research Institute.
It's been barely two months since the Financial Accounting Standards Board released the long-awaited new guidelines on consolidation of special purpose entities, or those deemed to be what FASB defines as variable interest entities (VIEs). Following the release of Financial Interpretation No. 46, industry players began scrambling for solutions, most believing that there are ways to restructure existing conduits such that they can remain off-balance sheet.
About one week after FIN 46 was released, SRI hosted an off-balance sheet financing conference, also at the Marquis, which drew in a few hundred people, including a decent number of onsite "walk-in" registrations, said organizer Rita Karsadi the day of the event.
When did ABCP get so big? Clearly, the success of these gatherings is correlated with the depth of accounting uncertainties. Last year, conference panelists marveled (vocally) at the growth in sessions that focused on accounting, which have historically been referred to as "hour-long sleeping pills," for example.
As the accounting horizon began to clear over 2002, ABCP market players were accepting a new reality: The consolidation project would most greatly impact the treatment of conduits. At some point, the ABCP panels and the accounting panels pretty much became one and the same.
That said, the awareness of the ABCP was gaining steam ahead of the confluence of events that led to FIN 46. Prior to the Enron Corp. fallout, and the newfound scrutiny for off-balance sheet vehicles, the ABCP market was on a volume tear, consistently gaining on the overall CP market. At the end of 2001, outstanding ABCP was still growing more than 15% year-over-year, typically about $100 billion ahead of year-ago volume. Corporates that lost access to the unsecured CP market began to sell assets, as was happening in the term ABS market.
Further, the ABCP securities arbitrage conduits were being hailed as one of the most prominent investors in triple-A term ABS.
In February of this year, the ABCP market contracted more than $18 billion to the current $706 billion, continuing the downward trend that started last January. The market is currently lagging year-ago volume by $21 billion, the greatest year-over-year decline to date (and only the third month this has happened).
Of course, this contraction is not solely associated with accounting trends, but also tied to the overall economic conditions and various other factors, analysts have noted. Though the ABCP market is down, the unsecured CP market is down further, with asset-backeds representing more than 53% of overall CP issuance. The ABCP market crossed the 50% threshold in October 2001.
While FIN 46 is the topic of the day, farther down the road, FASB is revisiting FAS 140 and the permitted activities of QSPEs issuing beneficial interests (formerly a project of the Emerging Issues Task Force). At least one prominent securitization accountant expects the next Financial Interpretation, FIN 47, to be an interpretation of FAS 140. The board meets again this Wednesday to continue discussion on FAS 140.
Meanwhile, at the March 5 meeting last week, FASB decided there is no need to issue further guidance or an amendment to FIN 46, though it concedes it may address specific concerns with FSPs, or FASB Staff Positions, which are open for commentary for 30 days, according to Marty Rosenblatt, securitization accountant at Deloitte & Touche and accounting chair of the American Securitization Forum.
Without a silver bullet
Following SRI's off-balance sheet conference in late January, the market has been to Arizona and back, collecting another few weeks' worth of thoughts. While some speeches are bound to be repetitive, the theory is that, with each subsequent gathering, market leaders are able to update the industry and each other of their progress.
"There's going to be a lot to talk about, that's for sure," said one industry source and moderator at this week's conference. "Has anybody found the silver bullet? No. It just hasn't happened."
There's bound to be a good deal of private meetings over the two-day gathering, whereby different parties will reveal or pitch their approaches, the source said.
"What it comes down to is that this is an economic issue for banks and they're trying to figure whether it even makes sense to keep using conduits at all," he added.
The relatively short, six-month transition period makes FIN 46 particularly challenging, market players have said. The chart to the right summarizes some easily found disclosures from financial service providers and other parties that are sizing up the impact of FIN 46 on their balance sheets.
In most cases, these filers stress the uncertainty and indicate that they are pursuing alternatives, such as the restructuring strategies that are sure to be focus of this week's discussions.
"We'll have a better sense of direction now that people have had the opportunity to discuss their concerns and alternative approaches," said Thomas Fritz, head of ABCP at Standard & Poor's.
Since the initial discussions, different approaches for restructuring ABCP conduits have taken shape. For multi-sellers, some players believe that a subordinated tranche, equal in size to what FASB would calculate as the expected loss, could be issued by an ABCP conduit to an investor willing to consolidate the conduit's assets.
The rating agencies confirmed interest in this approach. According to one agency source, rating an expected loss tranche would be similar to rating program credit enhancement.
It might be challenging, however, to find an investor willing to take on these assets, a ratings source said. It's anticipated that hedge fund-like investors might be a good fit.
Another approach touted by some is the use of independent asset managers to take over the reigns of a multi-seller conduit, consolidating the assets themselves. In previous issues of ASR, sources had described a structure that blends elements of CDOs and elements of conduits, with ratings based on a diversified pool of assets.
For securities arbitrage conduits that finance the purchase of highly rated investments with ABCP, the general goal has been to restructure the conduit to satisfy the requirements for a FAS 140 QSPE. Many arb conduits are already Qs, sources said.
However, the uncertainty of where FASB will come on its interpretation of FAS 140 has taken some of the steam from this boat.
S&P's Fritz noted that some of the restructuring overturns previous strategies that were meant to maintain deconsolidation.
"I find it interesting that some of the things that the accountants had advised banks to do when they were set up, in order to avoid consolidation, are being undone, in order to avoid consolidation," Fritz said.
He specifically pointed the bank taking on the role of the "referral agent," where the sponsor received a fee on a contractual basis, as opposed to the owning the assets. The agent was theoretically replaceable. To restructure as a QSPE, the sponsors will have to prove that they are not substantially "decision makers."
Financial Interpretation No. 46:
If not for the six-month transition period...
Bank of America ...would have potentially consolidated up to $25 billion associated primarily with multi-seller conduits; up to $1.3 billion in CDO related assets in deals where BofA acts as portfolio manager; up to $570 million in VIEs associated with lease arrangements; up to $2.7 billion associated with a municipal debt-backed issuance vehicle; up to $900 million in a total return swap repurchase entity.
Bank One Corp. ...would have potentially consolidated up to $42.8 billion in VIEs associated with multi-seller conduits and an investment vehicle. "Based on capital ratios as of December 31, 2002, consolidation of these entities would affect regulatory risk-based capital by reducing the Tier 1 risked-based capital ratio from 9.9% to 8.6% and total risked-based capital ratio from 13.7% to 12.1%."
Boeing Capital ...would have potentially consolidated up to $4.2 billion in VIEs associated with ETC and EETC vehicles.
Citigroup ...would have potentially consolidated up to $55 billion primarily in multi-seller conduits ($52 billion in Citi sponsored deals; $2.9 billion as third party liquidity provider); up to $17 billion in CDO related assets; up to $36.6 billion in other potential VIEs related to financing transactions for clients, such as leasing, or capital structuring.
Con Edison ...would have potentially consolidated a $353 million operating lease arrangement called the Newington Project; is reviewing other investments including two leveraged lease transactions, an investment in an Affordable Housing Program, and three power plant investments with assets and debt of $82.9 million and $42.5 million, respectively.
FleetBoston Financial Corp. ...would have potentially consolidated $6.2 billion in VIEs associated with ABCP conduits. Fleet states it is currently evaluating alternative structures that would permit the conduits to remain unconsolidated.
Goldman Sachs ...would have potentially consolidated roughly $8 billion. Goldman reports that total assets in VIEs it is associated with amount to about $10.4 billion, $1.7 of which is already consolidated.
Lehman Brothers ...only states that it has not yet completed the analysis of FIN 46. Most potential exposure is through VIEs associated with CDOs, warehousing arrangements and synthetic credit transactions.
Morgan Stanley ...would have potentially consolidated up to $8.5 billion in ABS and CDOs, plus $2.5 billion associated with CDOs in which Morgan's investment management arm is collateral manager.
PHH Group (Parent of Cendant Corp.) ...would have potentially consolidated Bishop's Gate Residential Mortgage Trust, a $2.5 billion mortgage conduit.
Principal Financial Group ...would have potentially consolidated $4.1 billion mortgage warehouse facility called Principal Residential Mortgage Capital Corp.
US Bancorp ...would have potentially consolidated two conduits: a $4.2 billion conduit of commercial loans, and a $9.5 billion conduit of high grade investment securities.
Source: Publically filed year-end statements with the Securities & Exchange Commission.
Special thanks to Marty Rosenblatt of Deloitte & Touch, and accounting chair of the American Securitization Forum, for sending out the relevant passages for most of the above companies.
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