Structured Finance and the Financial Turmoil of 2007 2008

Collateral providers sell assets to conduit cash sale

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Collateral providers: Sell assets to conduit Cash Sale of eligible assets (collateral of ABCP) Issuance of ABCP Liquidity facility provider (bank or syndicate of banks) Fees Fees Collateral (assets) : Can basically be anything, such as loans (including prime and sub-prime mortgages), debt securities (including bank debt, high yield bonds), asset- backed securities (RMBS, CMBS) and CDOs (CBOs, CLOs). Fees Fees BANCO DE ESPAÑA 21 DOCUMENTO OCASIONAL N.º 0808
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BANCO DE ESPAÑA 22 DOCUMENTO OCASIONAL N.º 0808 Table 2: Types of ABCP conduits % of total 1 (US, end- March 2007) Types of conduits Single-seller conduits 16% Conduits based on a single collateral provider which sells assets to the conduit. These conduits are often managed by a finance subsidiary of a large company or by a bank for its own business. For example, Ford Motor Company has its own finance subsidiary (“Ford Motor Credit”) which manages the conduit FCAR Owner Trust in order to finance specific activities of Ford (i.e. Ford Motor Company is the only seller of collateral). Multi-seller conduits 54% Conduits based on various collateral providers. For example, a bank can set up a multi-seller conduit to provide financing for a variety of bank clients. Collateral is mostly provided in the form of loans (i.e. trade, car, credit card, commercial and equipment loans/receivables). Limited exposure to mortgages and CDOs (8% respectively 4% of total collateral, end-March 2007). Hybrid- conduits Multi-seller conduits that not only invest in loans but also in securities. Securities arbitrage conduits 15% Conduits that have been especially established to exploit arbitrage opportunities. Most often used is “maturity arbitrage” (on the term structure of credit spreads) by issuing short-term ABCP and investing the proceeds in longer-term assets. Another possible form of arbitrage is arbitrage by banks, which seek arbitrage opportunities or capital relief associated with moving assets off the balance sheet. The exposure of these conduits to mortgages and CDOs is much larger than with single and multi-seller conduits (33% respectively 26% of total collateral, end- March 2007) Structured investment vehicles (SIVs) 6% Conduits which invest heavily in structured finance products (such as asset-backed securities) and obtain funds by issuing ABCP and medium-term notes (MTN) and long-term capital notes. SIV funds consist between one- third to more than 50% of ABCP; on average 35% of their liabilities consist of ABCP. SIVs also conduct “maturity arbitrage” by issuing short and medium-term paper and investing the proceeds in long-term credit assets. These conduits have significant investments in asset-backed securities. For example, as of end-October 2007, according to Moody’s, SIV’s assets comprised of prime US RMBS (11.3% of total assets), non-US RMBS (8.6%) and CMBS (7.4%). In addition, direct exposure to non- prime US RMBS was around 5%. Thus in total, almost one-third of SIV assets was linked to mortgage-backed securities. Further important assets were bank debt securities (29.4%) and CDOs (12.1%).
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