CLOs: ABN Amro opens a new asset class

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SovRisc is capital markets disintermediation and may transform the $50 billion export loan guarantee business.

“We looked at the structured trade finance market and discussed different ways of financing these portfolios,” says Niall Cameron, head of global markets at ABN Amro.

“What we have done is to take an asset class that was relatively illiquid and use securitization techniques to create a highly liquid bond.”

It’s a pattern that, over the years, has enhanced the efficiency of financing various assets including residential mortgage loans but also credit cards, leases and auto loans. In the case of SovRisc, the underlying assets in the $25 billion programme are export guarantee loans originated by ABN Amro. There are 22 loans guaranteed by the export credit agencies (of the US, France, Germany and UK), in the $1.05 billion SovRisc Series 1.

“In the ECA market this is something that has been talked about for 10 years,” says Gareth Thomas, head of cross-border structured finance at ABN Amro. These ECA institutions support exporters by guaranteeing loans supporting finance for capital goods.

This is not a true securitization, says Paolo Tomassetti, director in asset securitization, as payment does not rely on the performance of the portfolio but relies on the guarantors instead.

The complexity of repackaging this type of risk – four different export guarantee agencies – should not be underestimated. “It took 18 months of heaving and lifting to get done,” says Cameron. A large part of the process was spent getting the ECAs, investors and, most important, the rating agencies comfortable with the concept.

Tomassetti says that the overriding objective was to efficiently get a bullet maturity, not straightforward when the underlying assets are amortizing loans – unless there is significant overcollaterization or a liquidity facility.

ABN Amro created an innovative solution involving a two-stage process that begins seven months ahead of the scheduled redemption date. At the first stage, ABN Amro has an option to provide a liquidity facility or buy back the bonds. If ABN chooses not to exercise the trustee can instigate an online auction of the redemption portfolio with 15 banks. The next stage would entail a manager being selected to organize an ABS using the segregated portfolio. In addition to the $1 billion sold to institutional investors, the SPV also issued a $50 million A2 note, bought by ABN Amro, which is used to mitigate market risk regarding the ability to sell the assets at par and so is not credit enhancement.

These assets should provide a steady stream of bonds. Cameron foresees three deals a year sized at $1billion each. By using the capital markets in this manner ABN Amro will increase its competitiveness in the STF arena (Citigroup, SG, BNPP are the other leading players).

SovRisc priced at treasuries plus 34 basis points equivalent to Libor less 12bp at the time of pricing. Other banks have used ABCPs to fund these assets, which are typically originated at Libor flat or even less. However, conduit funding has accounting implications through the back-up lines they require.