Asset-backed commercial paper arbitrage conduit sponsors are looking at collateralized debt obligation and structured investment vehicle technology in order to extract costs from their vehicles, according to London-based lawyers who are receiving inquiries on the subject.
Recent accounting changes and anticipated changes to the regulatory capital rules are driving bankers to explore new structural combinations. Reducing the amount of required liquidity is one important mechanism for reducing costs, as are obtaining liquidity from other sources such as extendable CP and market value swaps.
SIV features are intriguing to ABCP conduit sponsors in particular because SIVs typically hold only 10% liquidity against their commercial paper. Such a low level of liquidity is especially important in an environment where liquidity is becoming more capital intensive, more expensive as a result and possibly scarcer, noted Mark Nicolaides, partner at London-based Mayer, Brown, Rowe & Maw. Whereas a typical ABCP conduit must hold 100% liquidity against the commercial paper it issues, if it incorporates SIV-like features then the liquidity requirement may drop significantly below 100%. Whether SIV liquidity levels will be achieved depends in large part on the number of SIV features a conduit sponsor and its rating agencies agree to incorporate.
Such hybrid structures are still exceptionally rare--only one conduit combining asset-backed commercial paper and CDO technology has been closed in Europe to date, for example--but market participants anticipate the coming year will see a marked increase in efforts to reduce the number of conduits issuing 100% liquidity-backed commercial paper. "Bank sponsors are reviewing their conduit structures and coming to the conclusion that there may be more efficient and profitable ways to fund their asset pools," said Nicolaides. ABN AMRO's North Sea Funding, which closed in July, serves as the first example of a conduit that incorporates CDO features.
"It is as though ABCP conduits, SIVs and CDOs represent the three corners of a triangle, and the area in the middle is the space bank sponsors are now intent on exploring," remarked Nicolaides.
