One of the most difficult asset-backed transactions for U.S. investors to get their arms around this year was likely Bank of America's Consumer Credit Reference Index Securities Program, dubbed CRISP 2002. While the practice of synthetic securitization is not new, particularly in the CDO market, CRISP - the first U.S. synthetic ABS of consumer assets - offered an unprecedented mix of protections against rising charge-offs in credit card portfolios.
BofA created an index based on the cumulative charge-off rate on several large credit card trusts of the industries top issuers. Via lead banker Goldman Sachs & Co., BofA arranged it so that it receives payments, according to a formula, in the instance that the index rises above a predetermined threshold of 7.75% for a period of time where cumulative losses exceed 1.25%. Going back to 1997, monthly credit card charge-offs have never topped 6.75%.
CRISP uses a catastrophe bond structure that allows BofA to hedge against "the catastrophic deterioration in consumer credit performance," according to Standard & Poor's analyst Joe Sheridan.
In a research report, Sheridan writes, "The technique can be effective in hedging risks for investors who have participated in large numbers of consumer asset-backed securities transactions and loan originators who wish to manage their exposures."
Essentially, the CRISP vehicle acts as a protection seller to BofA. CRISP issued $415 million in bonds to investors, the proceeds of which are held by Ambac Assurance Corp. in a portfolio of Guaranteed Investment Certificates (GICs). The interest from the portfolio of GICs is used to pay the bondholders. If the CRISP index never exceeds the 7.75% threshold through the life of the deal, investors receive full principal on the final payout. Should the index exceed the predetermined delinquency and loss thresholds, a corresponding portion of the GIC portfolio is liquidated and paid to BofA, translating as a principal loss to bond investors at final payout.
In the asset-backed commercial paper conduit world, via its EagleFunding Capital Corp., Fleet Securities structured several innovative financings for a unique list of issuers, including a film revenue securitization from production company DreamWorks SKG (co-managed by J.P. Morgan Chase), an intellectual property royalty stream securitization for children's development concern Sesame Workshop (Sesame Street), and a stadium revenue securitization for the Denver Broncos.
