Conduits restructure to optimize capital costs

The asset-backed commercial paper (ABCP) market has ended several years of stalled growth and resumed its progress toward $1 trillion in total outstanding amount. The next few years will bring more challenges, and opportunities, for ABCP conduits and their bank sponsors. The implementation of Basel II's revised bank regulatory capital requirements will change the economics of bank-sponsored conduits. The likely effects on arbitrage conduits, which invest primarily in rated securities, can be shown most clearly. The sponsors of these vehicles can use a number of new and developing structural features to reduce the capital costs and to preserve and enhance the economic benefits of these vehicles.

In a typical ABCP conduit structure, a bank or other financial institution (or occasionally a non-bank financing company or asset management company), informally called the sponsor, arranges for a special purpose entity (SPE) to be organized, to establish a programme for issuing short-term notes...