Abbey National Financial Products has structured the first USD10 billion arbitrage asset-backed commercial paper program to be structured entirely as a synthetic product. Adrian Mallinson, credit derivatives structurer in London, said it set up the program to transfer the credit risk of highly-rated asset-backed securities off its balance sheet with minimal credit enhancement. The reference entities will likely include, credit card debt, student loans and mortgages and over 75% of the portfolio will be AAA rated.
The program is named Fulbeck Funding Limited after the village in Lincolnshire, where Mallinson resides. He joked, "it was going to be called Blackheath Funding but he moved house."
In the credit-default swap, which creates the transaction, Abbey can add or remove reference assets, which are rated Aa3 or higher. Fulbeck must obtain additional credit enhancement or replace any assets, within 10 days, which fall below this level. This limits commercial paper investors' exposure to assets which default from a rating of Aa3 or higher in less than 10 days. Mallinson compared the risk profile of the product with the super senior tranche of collateralized debt obligations. ANFP invests the capital in reverse repos and deposit accounts to provide collateral on the credit-default swaps.
Investors could buy into the deal through two tranches of floating-rate senior notes maturing Dec. 18, 2011, which close Tuesday: A USD250 million Aaa rated tranche paying three-month LIBOR plus 50 basis points and a USD50 million A2 tranche paying LIBOR plus 250bps. The USD300 million notes offering provides capital for credit enhancement. Mallinson said it will issue commercial paper as it takes on more assets.