The new Spanish government fund Fondo de Adquisicion de Activos Financieros (FAAF) will start operations this week.

The fund is intended to strengthen domestic bank liquidity through asset purchases, with Cedulas or Spanish covered bonds playing the leading role.

"FAAF is intended to strengthen the liquidity of Spanish financial institutions through asset purchases, in order to stabilize the supply of credit to the private sector and to Spanish companies, which [have been] hard hit by the economic downturn," Dresdner Kleinwort analysts said. "It is not a refuge for nonperforming securities, however, but only accepts highly rated papers. Cedulas will play the leading role in this respect."

The government will offer two-year repo transactions for Cedulas, followed on Dec. 11 by genuine purchases of triple-A rated Spanish covered bonds. According Dresdner analysts, >30 billion to >50 billion ($63.9 billion) will be available for such transactions. This should alleviate the fear of supply pressure in the Jumbo sector and, in turn, help the secondary market, analysts said. However, the recently announced government plans for partial payment moratoriums on mortgage debts could distort cash flow patterns in Cedulas pools, and thus affect creditworthiness.

This week the fund will hold a public (reverse) auction for two-year repo transactions with a total volume of up to >5 billion.

At least double-A rated Cedulas Hipotecarias, joint-Cedulas, MBS and ABS secured by private or corporate loans can be offered. This includes papers already outstanding, provided they were issued after August 1, 2007.

The haircut calculations will be based on European Central Bank rules. This will be followed on Dec. 11 by a further public auction, under which the fund will make genuine asset purchases.

Only triple-A rated Cedulas Hipotecarias or joint-issues backed by Cedulas that are newly issued for this purpose and with one-year maturity will be admitted.

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

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