Although the technology used in Main Street Warehouse Funding Trust - a mortgage warehouse facility that provides short-term financing - has been seen before, it is the first time that an unrated, private entity such as AmeriQuest Mortgage Co. has made use of such a program as an integral part of its funding strategy.
"We were looking to grow our funding book from Wall Street banks by accessing the commercial paper market," said Ketan Parekh, vice president of capital markets at AmeriQuest. "This is an idea that we took from the bigger banks that have similar programs although not of this size." Parekh added that Main Street Funding, aside from being scalable, provides a cheap source of funding as well as short-term financing.
Main Street, underwritten by Banc of America Securities, issues extendible ABCP such as secured liquidity notes - which have an expected maturity date of up 180 days from the date of issuance - and medium term notes. The proceeds from these notes provide warehouse financing of non-prime mortgages to AmeriQuest.
Standard & Poor's reported that the securities are repaid mainly through the proceeds from the sale of the mortgage loans into the firm's various securitization trusts, exposing the deal to a variety of market-related risks. The rating agency said that swap counterparties absorb most of these risks as they are obligated to reimburse Main Street for both interest rate and market value shortfalls for all performing loans. Additionally, credit enhancement was sized to cover shortfalls from nonperforming loans.
AmeriQuest's Parekh added that multiple swap providers were included in the structure so that it could receive a P1 commercial paper rating from Moody's Investors Service. S&P rated the vehicle a comparable A1+.
Banc of America Managing Director Dan Goodwin stated that the size of the facility and the unrated and private nature of the company backing it were the largest hurdles to clear. In addition, there are two notables when it comes to Main Street Warehouse Funding. First, two of the series were swapped out to euro-denominated bonds - a first for this type of conduit transaction and a rarity for any ABS transaction. Second, the transaction was also the first of its kind to have limited recourse for the market value swap providers, as similar deals for public companies had full recourse to the parent entity.
Although Main Street currently funds 35% of AmeriQuest's warehousing needs - the facility is now at $6 billion - the company is planning to grow it to 40% of its liquidity. Parekh added that AmeriQuest plans to increase the trust to $10 billion in 2005. Aside from this facility, AmeriQuest still relies on traditional repo lines for the rest of its warehousing needs.
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