abc's of abcp

ABC's of ABCP

Jim AhernManaging Director - Securitization Co-Head ABS and ABCP Group

ABC's of ABCP 2

Table of Contents

What is ABCP?

History of ABCP

Types of ABCP Programs

ABCP Features/Characteristics

The ABCP Market

What is ABCP?

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What is ABCP?

Commercial paper described:Money market security, usually in the form of a promissory note, issued by corporations or banks

Typically used to purchase inventories or to provide working capital

Can be Self (Direct)-Issued or Placed through Dealers

Issued in Book-Entry Format

Typically issued at a discount, although can be interest-bearing

Commonly bought by money market funds

Exemption from the Securities Act of 1933

Maturity of less than 270 days

Not publicly available ($1 million typical denominations) – Rule 144a -QIBs

Proceeds required to fund current transactions

Exemption from the Investment Company Act of 1940 – Section 3(c)(7) - Qualified purchaser

Traditionally provides companies with a flexible low cost short-term funding alternative to bank debt

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What is ABCP?

Asset Backed Commercial Paper described:Commercial paper secured (i.e. “backed”) by assets, typically in the form of accounts receivable, loans, leases or securities

CP is issued from a special purpose vehicle (often called a Conduit) which is structured to be bankruptcy-remote

Typically highly-rated - usually in the top two short term rating categories from RatingAgencies

Is repaid at maturity through cash proceeds from asset collections or from issuance of new ABCP (i.e. “rolled”)

Like non-asset backed commercial paper ABCP is:

Unregistered with SEC

Typically purchased by money market funds – subject to Rule 2a-7 Eligibility

Sold book entry on a discounted basis

Background of ABCP

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Background of ABCP

Born of Capital Adequacy Rules

ABCP first appeared in the 1980s as a means for large commercial banks to finance their commercial customers’ trade receivables in a capital-efficient manner and at competitive rates.

1986 Basle Accord created strong incentive for Off Balance Sheet funding options.

Extended CP Market Access to Lesser or Unrated Companies

Afforded access to borrowers unable to issue their own corporate CP or to borrow from banks at practical rates.

Expanded Funding Sources for Higher Rated Companies

Funding anonymity has also been an attraction

Growth Has Paralleled ABS Market

Securitization techniques evolved and ABCP became a common source of warehousing for ABS collateral.

600% Market Growth from 1997-2007 peaking at $1.2 Trillion in Summer 2007

Diversification of Asset Types & Products

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Why do (bank) sponsors establish ABCP programs?

Balance Sheet Management Reduce regulatory capital requirements or lever existing capital

Finance high quality, low margin assets off the bank’s balance sheet

Control size of balance sheet

Regulatory Capital ArbitrageBetter align regulatory capital with economic risk-based capital

Improves financial ratios

Additional source of highly liquid funding

Help address loan growth expectations > deposit growth

Consistent alternative source of fee-based revenueIncreases non-interest income as a percentage of total income

Enhances market awareness of bank sponsors

Alternative FundingAsset specific funding program separate from sponsors’ direct liabilities

Background of ABCP


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ABCP Program Structures employed today include the following:

Multi-seller

Single-seller

Securities Arbitrage Vehicles

Structured Investment Vehicles

Credit Arbitrage

Loan-Backed

Hybrid Vehicles - incorporating a combination of the above types

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Types of ABCP Programs: Multi-Seller Programs

A Multi-Seller ABCP Conduit is a limited purpose, bankruptcy-remote SPV that provides financing for receivables pools generated by multiple, unaffiliated originators/sellers

Multi-seller programs are most commonly established and “sponsored” by large commercial banks and typically provide financing to that bank’s corporate clients

These banks typically serve as Program Administrator or Administrative Agent for the Conduit, and commonly provide liquidity and credit support as well

Multi-seller Conduits are typically structured to:

Make loans against or purchase interests in receivables pools

“Warehouse” assets prior to a term ABS take-out, and/or

Purchase securities

ABCP issued from a large multi-seller vehicle is typically perceived as low risk for investors due to

Originator diversification

Asset diversification and Deal-Specific Credit Enhancement

Program-Wide Credit Enhancement and 100% Liquidity Support

Sponsorship

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dividends

Types of ABCP Programs: Multi-Seller Schematic

Obligors Obligors Obligors

Seller nSeller 3

collections advances againstnew receivables

ABCP Investors

Issuing & Paying Agent

credit supportpayments

fees

liquidity advances

fees

payments on maturing ABCP

purchase priceof new ABCP

payments on maturing ABCP

purchase priceof new ABCP

fees

ABCP ConduitCredit Enhancement

Providers

LiquidityProviders

Administrator

ConduitOwner

Obligors

Seller 2

Obligors

Seller 4

Receivables Generated

(generally money market funds)

Seller

SPV “Transferor”

ABCP Conduit

True Sale

First Priority Perfected Security

Interest

Receivables

Receivables

First Loss / Equity holder

Seller 1

ABC's of ABCP 13

Single-seller ABCP conduit - a limited-purpose, bankruptcy-remote entity that issues CP as a way to finance the receivables of a single originator. Since there is one seller, seller-insolvency is greater than in a multi-seller vehicle.

Single-seller programs are popular among large credit-card issuers, major auto manufacturers and some mortgage originators. Motivations for their use include the following:

Cost benefits over participating in another sponsor’s multi-seller program

Allows sponsor more control over operations

Favorable accounting or tax treatment

Securities Arbitrage Vehicles – these vehicles are setup to efficiently fund the purchase of various types of securities; the two basic types are Structured Investment Vehicles and Credit Arbitrage Vehicles.

Structured Investment Vehicle (“SIV”): SIVs are market value programs that purchase highly-rated securities (ABS, corporate debt) and seek to benefit from spread differentials between longer maturity assets and short term funding.

An SIV would typically fund itself by issuing both CP and MTNs as well as equity-like capital notes.

SIV-Lites - these structures are hybrids between CDO’s and traditional SIVs. In their quest to gain additional yield particularly in a tightened spread environment, they are more levered than a typical SIV and often invest in subprime mortgages due to their higher spread. – This combination of higher leverage and exposure to more risky collateral put SIV-Lites at greater risk when the

market started to experience liquidity problems in mid-2007

Credit Arbitrage Vehicles – expose investors to credit risk, like a cash flow CDO but not market risk (as an SIV). They are more passive than a typical SIV and their risk profile tends to follow that of their sponsor’s securities portfolio.

Loan-Backed – similar to a CLO, these are designed to fund a portfolio of bank loans, often to unrated companies

CDOs: ABCP has also been issued out of CDOs, typically being the most senior class in the capital structure. CDO-issued ABCP usually benefits from 100% liquidity support

Hybrids: ABCP programs encompassing some characteristics of more than one of the above types of programs

Types of ABCP Programs: Other Types of ABCP Programs

ABCP Conduit Characteristics

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Full Support vs. Partial Support

ABCP programs can be “Fully supported” or “Partially supported” depending on the level of external credit enhancement provided to the program:

Fully Supported: Fully supported programs use an external support facility to provide 100% coverage against credit risk and liquidity risk to support the transactions within the conduit. – Due to the external support, rating agencies focus on the strength of the support provider(s), which are

usually highly rated banks.– Forms could be a guarantee, LOC, surety bond, TRS or liquidity facility addressing credit risk

Partially-Supported: These programs make use of two support facilities; a credit enhancement facility aimed at reducing credit risk (and to some extent liquidity risk) and another facility focusing on liquidity. The facilities do not cover 100% of credit risk, so rating agencies focus on receivables performance in assigning ratings; i.e. investors bear a portion of the credit risk of the receivables.– Partially funded facilities evolved in part due to capital requirements imposed on support providers by

bank regulators

Post Review vs. Pre-Review

Post-Review – these agreements allow for the conduit to enter into new transactions that are aligned with the conduits existing written credit and investment policy without first getting rating confirmation; The rating agencies then review the transactions at a later date as part of their customary periodic review process. – Most Single-Seller Programs and fully supported ABCP conduits are Post Review

Pre-Review – New transactions must be submitted to the rating agencies prior to funding for their confirmation of conduits short term ratings. – Most multi-seller programs are Pre-Review

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Credit Enhancement

Transaction Level – used to cover losses on a specific transaction

This is the first level of protection against deterioration of the collateral

Available only to a specific transaction, not to cover losses on other transactions

Forms: Overcollateralization, subordination, excess spread, reserve account, guarantee, or liquidity facility providing credit protection or partial seller recourse

Program-wide – used to cover losses across most receivables in the conduit

Second layer of protection against losses after transaction level protection

Available to all transactions in a conduit

Forms: LOC, Surety Bond, third party guarantee, asset purchase agreement or loan facility

Program wide enhancement increases with the number of transactions in a conduit

Liquidity Facilities

Required to ensure that sources of funds are available to repay maturing CP on a timely basis.

Often structured as 364-day renewable facilities (364-day maturity driven by regulatory capital guidelines)

Typically sized at 102% of the transaction limit; the extra 2% for partially hedging interest rate risk.

Provided by highly rated financial institutions

May be transaction-specific or program-wide

Liquidity Loan Agreement (“LLA “) – commitment to lend to a conduit when requested

Liquidity Asset Purchase Agreement (“LAPA”) – commitment to purchase an asset when requested


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Conduit RatingsThe majority of ABCP programs carry the highest short term ratings (P-1, A-1/A-1+, F1/F1+, R-1) (1), which is the rough equivalent to long-term rating categories in the Aaa to A2 range / AAA to A range.

Service ProvidersAside from credit and liquidity support, Conduits typically have numerous Service Providers, including some or all of the following:

Administrator and/or Manager

Issuing & Paying Agent

Placement Agent

Collateral Agent

Custodian

Hedge Counterparty

Credit and Investment PolicyConduits are governed by investment restrictions set forth informally or formally in a Credit and Investment Policy.

Collateral eligibility requirements, portfolio composition and concentration limits are often strictly defined

Issuance TestsMust be satisfied before ABCP can be issued

Non-bankruptcy, positive tangible net worth, sufficient liquidity, asset quality

Authorized Amount vs. Outstanding AmountOutstanding Amount < Authorized Amount

(1) Moody’s, S&P, Fitch, DBRS respectively. DBRS further delineates short term ratings into high, middle and low.


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ABCP Liabilities – Different Forms of ABCP

Extendible CP: ABCP programs are structured similar to “normal” ABCP programs, but the sponsor has the option to extend the notes to a legal final maturity out to 397 days if new CP cannot be issued to repay maturing CP on the expected maturity date.

Upon extension, investors receive higher spread until the CP is paid down, typically L+25.

Extendible programs are market value programs, that is they typically do not have external liquidity support and rely on the inherent liquidity of the assets through whole loan sales or securitizations to pay off extendible notes

Extendible programs have been used for various types of assets including credit cards, trade receivables, mortgages, floorplan and student loans

Market value swaps are often used in extendible programs to hedge price risk, interest rate risk or for reasons of liquidity/credit enhancement

Some extendible ABCP programs are referred to as Secured Liquidity Notes

Medium Term Notes (“MTN”): MTNs are not commercial paper but are used by some ABCP vehicles as an incremental funding source

MTNs have maturities ranging from 180 days up to 30yrs and bear long term ratings, often triple-A and generally issued on a floating rate, interest bearing basis

MTNs can be issued to reduce the need for additional backup liquidity as well as diversify funding sources and locking in longer term funding to complement short term ABCP

Opportunistic issuance is also a key advantage of MTNs as the ability to come to market quickly when favorable conditions prevail could mean the difference between operating in the red and a profitable trade

The ABCP Market

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The ABCP Market – Historical Volume

Source: Federal Reserve

ABCP Outstanding Volumevs. Unsecured CP

$-

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

Mar-92

Dec-92

Sep-93

Jun-9

4Mar-

95Dec

-95Sep

-96Ju

n-97

Mar-98

Dec-98

Sep-99

Jun-0

0Mar-

01Dec

-01Sep

-02Ju

n-03

Mar-04

Dec-04

Sep-05

Jun-0

6Mar-

07Dec

-07

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

YOY % change of ABCP (right axis) Unsecured CP Asset Backed Commercial Paper Outstanding

$ billions

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The ABCP Market – Historical Volume

Source: Moody’s, S&P, Federal Reserve.- Global includes the US, EMEA, Australia, New Zealand, Canada, Japan. EMEA data as of 10/30/07 - Non-USD issuance converted to USD using year-end F/X rate

Global ABCP Outstanding Volume(end of year amounts)

$256.1$381.8

$520.8$645.8

$765.8 $752.8 $717.3 $744.4

$926.4$1,076.5

$816.3

$135.4 $175.6 $221.4$276.8

$329.4

$488.4

$407.4

$86.7

$25.8

$61.7$45.3

$79.1

$92.8

$72.1

$54.3

$48.3

$15.6

$36.4

$40.1

$38.7$40.2

$26.9

$4.3

$11.0

$11.0

$16.9 $19.3$26.0

$33.3

$9.5

$33.9

$46.0

$57.1

$21.1$14.2$6.4

$24.6

$21.3

$28.5

$33.2

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$ billionsUS EMEA Canada Australia and NZ Japan

$301.9 $463.5 $629.9 $783.6 $963.3 $1,034.1$1,002.2 $1,133.4 $1,383.0 $1,732.2 $1,393.2Totals:

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1980s and early 1990s: ABCP outstanding volume enjoyed strong growth since the markets inception in the 1980s fueled by tremendous growth in consumer assets such as credit cards and autos plus regulatory capital pressures on bank balance sheets

ABCP evolved from its roots financing trade receivables into an important tool for the financing of several other asset types

Loan-backed programs emerged in the early 1990s

Mid 1990s: Credit arbitrage programs were introduced into the marketplace

Late 1990s: Hybrid programs, Single-Seller programs and Extendible note programs were introduced

Early 2000s: SIV’s were introduced (and experienced rapid growth up until mid 2007)

The reduced volume of ABCP in 2002-2004 impacted the corporate CP market more dramatically-especially in the non-financial sector and was due to several factors:

Given the then-slowed economy, funding needs were generally down

A flat yield curve and persistent low rate environment made longer term financing more attractive

Increased credit concerns during a period of economic stress evidenced by many corporate downgrades

Uncertainty over pending Regulatory/Accounting changes:

An event which threatened to radically alter the state of the ABCP market was the introduction of FASB'sFIN46/FIN46R in 2003 which required ABCP sponsors to either consolidate conduit assets on-balance sheet or restructure their programs to transfer the first loss position a third party.

ABCP Market Trends

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2007: Outstanding U.S. ABCP volume reached a record high in July 2007, hitting nearly $1.2 trillion.

Since that point, U.S. ABCP outstandings have fallen 30% by year end 2007

2004-2007 Volume Growth was fueled by “Market Value Programs” - which rely on the liquidity and viability of Term ABS markets for refinancing and for asset valuation, specifically:

Extendible ABCP programs (particularly Mortgage Backed), and

SIV’s

As the crash in the subprime mortgage market came during the summer of 2007, Market Value Programs were hit hard by shattered investor confidence and the lack of available liquidity

Some Extendible Note Programs were unable to roll paper and were subsequently forced to extend ABCP with existing noteholders. Many of these programs have shut down.

SIV’s were impacted on both the asset side (declining values due to marks on collateral) and the liability side (lack of liquidity drove higher funding costs). As asset values have declined and liquidity has dried up, may SIV’s have ended up on the balance sheets of bank sponsors.

ABCP Market Trends

ABC's of ABCP 24

Liquidity Crunch remains but is Subsiding: The liquidity crisis that hit in mid-summer 2007 placed ABCP conduits under some of the most intense funding pressures they have ever experienced through year end 2007. Early 2008 prospects appear to be improving as investors slowly return and funding costs subside.

Flight to Quality: Due to the recent liquidity challenges and current market conditions, for the immediate future the programs that will be favored will be those bank-sponsored, multi-seller programs covered by traditional liquidity facilities backed by well-diversified portfolios managed by strong, experienced Sponsors

Market Tiering: Similar to what has occurred in the term ABS market, recent market volatility has also resulted in tiering among ABCP issuers with the strongest, most experienced sponsors getting the best pricing

Death of Many Market Value Programs: Market value programs are not likely to recover soon if at all, as the market value model on which these programs have relied no longer appears viable

Spread Widening prevails but is Improving: Following other credit products, commercial paper spreads widened significantly in the latter half of 2007. After stabilizing somewhat from the end of September to the end of November, spreads widened again for the remainder of the year.

Spreads averaged 1ML - 3bps from January 2007 until August 8, 2007; from August 9 through year-end, spreads averaged 1ML + 36bps (1). Early 2008 spreads appear to be subsiding but still remain above LIBOR.

The ABCP Market Today

(1) Federal Reserve, Bloomberg

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The ABCP Market Today – 2007: A Tale of Two Halves

Source: Bloomberg, Federal Reserve

2007 Funding Levels

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

1/1/07

1/15/0

71/2

9/07

2/12/0

72/2

6/07

3/12/0

73/2

6/07

4/9/07

4/23/0

75/7

/075/2

1/07

6/4/07

6/18/0

77/2

/077/1

6/07

7/30/0

78/1

3/07

8/27/0

79/1

0/07

9/24/0

710

/8/07

10/22

/0711

/5/07

11/19

/0712

/3/07

12/17

/0712

/31/07

Rat

e (%

)

1m LIBOR Federal Funds ABCP 30 day yield (A1+/P1)

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The ABCP Market by Program Type

Moodys's Rated Programs as of September 30, 2007

Program Type

ABCP Outstanding

($ Mil.)% by

Outstanding Number% by

Number

Multi-Seller 655,526.0 49.4% 140 37.2%Sec. Arbitrage 173,761.0 13.1% 42 11.2%Single-Seller 173,588.0 13.1% 74 19.7%Hybrid 153,259.0 11.5% 36 9.6%SIV 95,292.0 7.2% 60 16.0%Repo/TRS 56,176.0 4.2% 11 2.9%SIV-LITE 5,170.0 0.4% 8 2.1%Loan-Backed 3,413.0 0.3% 1 0.3%Other 11,271.0 0.8% 4 1.1%Total $1,327,456 100.0% 376 100.0%

ABCP Market by Program Type

Multi-Seller49.4%

Sec. Arbitrage13.1%

Single-Seller13.1%

SIV-LITE0.4%

Loan-Backed0.3%

Hybrid11.5%

Other0.8%Repo/TRS

4.2%SIV

7.2%

Moodys's Rated Programs as of September 30, 2000

Program Type

ABCP Outstanding

($ Mil.)% by

Outstanding Number% by

Number

Multi-Seller 348,853.0 63.4% 144 48.0%Sec. Arbitrage 106,366.0 19.3% 73 24.3%Single-Seller 48,191.0 8.8% 57 19.0%Loan-Backed 26,793.0 4.9% 17 5.7%Hybrid 10,867.0 2.0% 8 2.7%Other 9,583.0 1.7% 1 0.3%Total $550,653 100.0% 300 100.0%

ABCP Market by Program Type

Multi-Seller63.4%

Sec. Arbitrage19.3%

Hybrid2.0%Loan-Backed

4.9%

Single-Seller8.8%

Other1.7%

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The ABCP Market – The Sponsors

Program Name AdministratorCP O/S

($M)Lexington Parker Capital Company Liberty Hampshire Company 20,750Sheffield Receivables Corporation Barclays Bank PLC 19,458Ranger Funding Company LLC Bank of America, N.A. 15,839Thames Asset Global Securitization No.1 Royal Bank of Scotland PLC 15,256CAFCO, LLC Citibank, N.A. 15,052Variable Funding Capital Corporation Wachovia Bank, N.A. 14,795Falcon Asset Securitization LLC JPMorgan Chase Bank 14,778Park Avenue Receivables Company LLC JPMorgan Chase Bank 14,738CRC Funding LLC Citibank, N.A. 14,359Barton Capital LLC Société Générale 14,305Concord Minutemen Capital Company Liberty Hampshire Company 14,157Jupiter Securitization Company LLC JPMorgan Chase Bank 13,655CHARTA, LLC Citibank, N.A. 13,470Crown Point Capital Company LLC Liberty Hampshire Company 13,464Fenway Funding LLC Hudson Castle Group Inc. 12,781Gemini Securitization Corp LLC Deutsche Bank AG 12,778Yorktown Capital LLC Bank of America, N.A. 12,622Chariot Funding LLC JPMorgan Chase Bank 12,260Galleon Capital LLC State Street Global Markets 11,928Amsterdam Funding Corporation ABN AMRO Bank N.V. 11,482Top 20 Total $287,927Total Multiseller Outstandings $655,526

20 Largest Multiseller ABCP ProgramsAs of September 30, 2007

Moody’s ABCP Program Index

Administrator $ Millions # IssuersCitibank, N.A. 104,382 17 7.9%ABN AMRO Bank N.V. 74,970 9 5.6%JPMorgan Chase Bank 62,352 6 4.7%Bank of America, N.A. 60,464 12 4.6%QSR Management Limited 51,675 10 3.9%HSBC Bank PLC 46,162 6 3.5%HBOS Treasury Services plc 38,445 2 2.9%Deutsche Bank AG 38,310 10 2.9%Rabobank Nederland 36,599 9 2.8%Société Générale 36,353 4 2.7%ING Bank N.V. 32,287 4 2.4%Barclays Bank PLC 29,677 3 2.2%Bank of Tokyo-Mitsubishi UFJ 28,979 10 2.2%State Street Global Markets 28,410 3 2.1%WestLB AG 27,812 5 2.1%Fortis Bank S.A./N.V. 27,662 1 2.1%Dresdner Bank AG 26,213 5 2.0%Lloyds TSB Bank PLC 25,737 1 1.9%Calyon 25,425 5 1.9%Hudson Castle Group Inc. 23,717 3 1.8%Top 20 Total 825,630 62.2%Total 1,327,456 100%

Market Share (%)

20 Largest ABCP Program Administrators As of September 30, 2007

ABC's of ABCP 28

Other represents an aggregate of categories that individually represent less than 1%.Moody’s

Asset Types in Multiseller and Hybrid ABCP Programs by CP Outstanding Amount

($670 Billion CP Outstanding As Of 08/31/07)

The ABCP Market – Asset Type and Originator Rating

Not Rated42%

Baa34%

Baa24%

A24%

Baa15%

A34%

B21%

B3<1%Ba3

1%Ba21%

A13%Ba1

3%

Aa25%

Aa14%

Aa34%

B14%

Aaa11%

Caa2<1%

Caa1<1%

Originator Ratings in Multiseller and Hybrid ABCP Programs by CP Outstanding Amount

($670 Billion CP Outstanding As Of 08/31/07)

CBO & CLO4%

Auto Leases4%

Securities11%

Auto Loans11%

Commercial Loans10%

Equipment Leases2%

Equipment Loans1%

Other Mortgages2%Floorplan

2%

Consumer Loans3%

Commercial Mtge Loans2%

Credit Cards12%

Other8%

Student Loans7%

Residential Mortgages 5%

Trade Receivables14%

Insurance Premiums1%

Gov't Guaranteed Loans1%

(a)

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abc's of abcp