In keeping with a recent trend in the ABCP business, HSBC Bank is implementing critical changes to its partially supported credit arbitrage conduit called Solitaire Funding.

Now the program has struck repurchase agreements between HSBC and each of the program's six purchasing companies. Also, its program-level credit enhancement has been increased significantly, up from $240 million to $1.2 billion.

The repo facility agreements call for a purchasing company to enter into repurchase transactions with HSBC as counterparty with respect to securities owned by that purchasing company, according to Moody's Investors Service. They will provide an alternate source of funding that can be used as a backup for ABCP issuance or liquidity draws.

Certain provisions of the master repo agreement were amended to protect Solitaire from risks that might threaten its Moody's P-1' rating. No margin calls or haircuts will be permitted, and any shortfall between the purchase and repurchase price will be covered by hedging agent indemnities. Also, certain events of default have been excluded.

The additional credit enhancement also comes with firm stipulations. Provided in the form of a letter of credit from HSBC, the enhancement will cover maturing ABCP issued on or after the date of the LOC and repurchase price obligations in respect of defaulted securities. Also, the enhancement will cover shortfalls in amounts required to repay ABCP or the repurchase price following the sale of securities. However, the drawing cannot cause the remaining credit enhancement to fall below the amount required for the program.

HSBC declined to comment on the changes to its program, but these amendments fulfilled the expectations of market participants who said that programs such as Solitaire would undergo changes in order to maintain their appeal to investors. Launched in November 2001, Solitaire is authorized to issue up to $24 billion of ABCP.

As Solitaire adapts to new market conditions, other changes were on the way in the ABCP business. The KKR Funding Trust, a partially supported, single-seller extendible note program sponsored by KKR Financial Holdings, extended the maturity date on its maturing paper past the initial extension date, impacting ABCP prices mid-week, according to an 8-K filing from KKR Financial Holdings.

Under an arrangement called the October Restructuring, KKR Financial moved the original maturity date of the vehicle's SLNs so that about 50% of the principal would be due Feb. 15, 2008, with the rest due on March 13, 2008. The February extension date has been moved again to March 3.

The latest development appears to be a tactic to give the vehicle enough time to sell off certain underlying assets, according to market sources familiar with the vehicle.

The October Restructuring also called for certain holders of the SLNs to receive an in-kind distribution of the underlying MBS as compensation for the outstanding principal balance of SLNs. The new extension will give those SLN holders the right to receive MBS as collateral for outstanding paper.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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