Perhaps associated with the June 30 deadline to restructure under FIN 46, the asset-backed commercial paper market has shown two consecutive weeks of declining volume, ending last Wednesday below the $720 billion mark, after pushing over the $740 billion mark in mid-June. As interest rates fell again last week, commercial paper discount rates have hit one-year lows at several maturities (see p. 33), according to the Federal Reserve.

Meanwhile, the rating agencies were reporting a flurry of restructuring activity last week, mostly variations on the expected loss tranche approach to mitigate consolidation onto the sponsor's balance sheet.

It looks like between two and four conduits will meet the deadline, which would require the sale transaction to close, and for cash - from the equity investor to the conduit - to change hands by June 30.

Apparently, by the time these structures are being shown to the rating agencies for approval, the transactions are fairly complete. "When it comes to us, things are very well vetted at that point," said Deborah Siefe, of Fitch Ratings. "So far, of the structures that we've reviewed, there haven't been credit issues."

According to Sam Pilcer, who heads ABCP at Moody's Investors Service, there are about 160 conduits outstanding. Of those, only 50 to 60 involve significant bank sponsors, and of those, only 30 to 40 players are either in the U.S. or Canada, where restructuring is a potential goal.

Pilcer said it's possible that the restructurings, and subsequent equity purchases, will be kept below the radar screen - unannounced by any of the parties involved - so it might be difficult to form a complete picture of who's doing what.

Variable funding notes

Meanwhile, market players are noting a trend of CDOs in the pipeline with CP funding components to them, to make up for difficultly in raising funds pre-ramp up.

It's understood that these are typically done through a variable funding note that is placed directly in an ABCP conduit, which allows the CDO warehouse-like access to funds for ramping up. The conduit provides the funds by issuing ABCP.

The Blue Heron series of CDOs structured by West LB have generally had a short-term funding tranche that allows them to issue directly into the short-term market.

This is different than the direct purchase of closed-end term notes by securities arbitrage conduits - which were solid providers of liquidity at the triple-A level to CDOs a year or two ago. While conduits are still considered a large investor component to the top classes of CDOs, the spate of downgrades have caused the conduit market to be weary of long-term commitment to what basically turned into, from a ratings perspective, the most volatile ABS sector, a CDO analyst said.

Because ABCP conduits must maintain a certain asset quality, if a distressed CDO was held by multiple conduits, several of them could have inclined to sell simultaneously, following downgrade, explained the analyst.

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