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SLN Market Overview
SLN issuance is currently a “hot topic” due to:
– Strong and growing demand for large warehouse funding commitments in consumer
related asset classes such as mortgages, student loans and auto;
– Regulatory actions that increased the cost of traditional bank liquidity facilities is
providing incentive to develop alternative liquidity structures using derivative
technology; and
– Rapid growth to $85 bln as of November 2004 mostly fueled by mortgage programs.
Over 50% of major ABCP investors purchase the extendible product.
Trading premium for extendibles has decreased to less than 5bps when compared to non-
extendible ABCP.
Issuance of extendibles is expected to continue to increase as ABCP sponsors move to
manage their liquidity and sponsors, sellers and investors become more comfortable with
the risks and techniques.
Market value swap structures will become more widely used as the Market Value Swap
carries the most favorable capital treatment.
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Overview of SLN Programs in the Market
There are over 30 active SLN programs in the market backed by assets including
receivables, securities, loans/leases (includes mortgages), and credit cards.
Programs in the market include multi-seller and single seller programs.
– Of the single seller programs in the market 10 are U.S. based residential mortgage
conduits.
– The remaining single seller programs in the market are predominantly backed by
securities, credit card or auto loans.
– Nightwatch will be the third conduit sponsored by ABN AMRO that issues extendibles.
Other programs include Tulip Funding Corp. and North Sea Funding, LLC.
Support for extendible programs can be in the form of
– Market Value Swap to protect against the changes in the interest rates and market
value of the assets but not the credit risk to the transaction;
– Total Return Swaps to cover both the credit and market risk;
– Traditional Liquidity Facilities sized to either 100% of the program or a lesser amount if
the program relies on the underlying cash flow of the assets; and
– Put/Repurchase Agreements.
10 of the SLN programs in the market are supported by Market Value Swaps.
A majority of the remaining programs in the market are supported by either a fully or
partially supported liquidity facility.
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SLN Programs in the Market
Rated SLN Programs
Sponsor Issuer Multi-Seller Assets Financed Type of Support
ABN AMRO Bank N.V. North Sea Funding LLC N Securities Partially Supported Liquidity
AIG Financial Products Curzon Funding Limited N Securities Total Return Swap
Alliance Capital ASAP Funding Ltd. Y Securities Total Return Swap
BSN Capital Partners Chesham Finance Limited N Securities Repurchase Agreements/Loans
Deutsche Bank Lakeside Funding LLC N Securities Put Agreement
Dresdner Kleinwort Wasserstein Brahms Funding Corp. Y Securities Total Return Swap
Friedman Billings and Ramsey Georgetown Funding Company LLC Y Securities Repurchase Agreements
ING Capital Ajax Bambino Funding Ltd. N Securities Credit Default Swap and Interest Rate Swap
Protective Life Insurance CPI Funding Corp. N Securities (CMBS) Market Value Swap
Rabobank Nederland Monument Gardens Funding N Securities Put Agreement and Cost of Funds Swap
Stanfield Global Strategies Mica Funding LLC Securities Total Return Swap/Fully Supported Liquidity
Thornburg Mortgage, Inc. Thornburg Mortgage Capital Resources N Securities Repurchase Agreement
Wachovia Securities Inc. Patriot Funding LLC N Securities Hedging Agreement
ABN AMRO Bank N.V. Tulip Funding Corp. Y Receivables Fully Supported Liquidity
Barclay's Bank Stratford Receivables Company LLC Y Receivables Partially Supported Liquidity
CDC Eiffel Funding Y Receivables Partially Supported Liquidity
Hudson Capital Group Fenway Funding Y Receivables Total Return Swap/Fully Supported Liquidity
Hudson Capital Group Foxboro Funding Y Receivables Total Return Swap/Fully Supported Liquidity
Promontory Asset Finance Freedom Park Capital LLC Y Receivables Put Agreement
American Home Mortgage Broadhollow Funding, LLC N Mortgages Market Value Swap
Ameriquest Mortgage Main Street Warehouse Funding Trust N Mortgages (Non-prime residential) Market Value Swao
Countrywide Home Loans Inc. Park Granada LLC N Mortgages (Prime residential) Market Value Swap
Countrywide Home Loans Inc. Park Sienna LLC N Mortgages (Non-prime residential) Market Value Swap
CTX Mortgage Harwood Street Funding I, LLC N Mortgages (Prime residential) Market Value Swap
CTX Mortgage Harwood Street Funding II, LLC N Mortgages (Prime residential) Market Value Swao
GMAC MINT N Mortgages Reduced Liquidity
Household Finance Corp HSBC Real Estate N Mortgages Market Value Swap
New Century Mortgage Von Karman N Mortgages (residential) Total Return Swap
Principal Financial Services Principal Residential Mortgage Capital Resources LLC N Mortgages (Residential) Market Value Swap
AIG Financial Products Nyala Funding LLC N Loans Total Return Swap
Ford Motor Credit Motown Notes N Loans (Auto Dealer Floorplan) Reduced Liquidity
GMAC CRE- 8 N Loans (mortgage and student loan) Market Value Swap
Citicorp Dakota CP Notes Program N Credit cards Reduced Liquidity
Greenwood Trust Company Newcastle Certificates Program N Credit cards Reduced Liquidity
MBNA Emerald Notes Program N Credit cards Reduced Liquidity
Sources: Moody's, Merrill Lynch
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ABN AMRO’s Extendible Conduit
ABN AMRO views the developing extendible commercial paper and secured liquidity note
market as an attractive funding and liquidity source for conduits.
ABN AMRO is close to finalizing its new SLN conduit.
– Target assets include those with an active ABS market (mortgages, student loan,
autos, equipment).
– Conduit will act as warehouse during the asset accumulation period prior to term
securitization.
Alternative liquidity sources:
– Conduit will issue Secured Liquidity Notes ("SLNs").
– The SLN investor holds a component of the liquidity risk given that the SLN maturity
can be extended by the program administrator.
The SLN investor is protected by the underlying liquidity/ performance of the assets.
A market value swap will protect against market/ basis risk and interest rate risk during the
extension period. Back to Back market value swaps will be in place with the Seller.
Credit enhancement to a “AA” or higher level will protect SLN investor from credit loss.
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SLN Conduit Structural Diagram
Extendible CP and
Callable Note Investors
(both US and European)
Funding
Notes
Nightwatch Funding LLC
Extendible CP and Callable Note
Multi Seller Conduit
(a Delaware entity)
Proceeds
US Customer #1
(Seller)
Assets
Cash
Seller SPE
Loan
Agreement
Cash
Swap
Counterparty
Deal specific
Market Value
Swap
European Customer #1
(Seller)
Cash
Seller SPE*
Assets
ABN AMRO
Bank
Program
Liquidity
Loan
Agreement
Cash
Deal
specific
Market
Value
Swap
Swap
Counterparty
Program
Enhancement
* SPE structure may vary depending on jurisdiction
ABN AMRO
Bank
Customers would sell their assets to a Seller
SPE that will be funded through a Loan
Agreement by an ABN AMRO sponsored
Conduit that issues Funding Notes.
The Conduit (a Delaware entity) would issue
Funding Notes in both the US and European
markets to fund the pools of US and
European customer assets.
Each transaction would have specific deal
credit enhancement to cover credit default
risk associated with the assets.
Program Liquidity would be provided by ABN
AMRO. This Program Liquidity would fund, to
the extent available, prior to any Funding
Note extension to provide liquidity in the
case of a market disruption. It will not act as
credit support.
ABN AMRO may also provide separate
program enhancement to the Conduit.
Additionally, the Market Value Swaps or
other liquidity instruments would protect the
liquidity providers and the Funding Note
Investors from the market risk of the assets
until they can be sold.
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SLN Transaction Structure
The transaction funded through the multi-seller extendible note conduit will be structured in line
with a transaction funded through a Multi-Seller ABCP conduit. The difference being that the
SLN conduit will be supported by the inherent liquidity of the security as well as a deal specific
market value swap. Deal specific bank liquidity will not be used in this structure.
Caterpillar Financial Asset Trust will issue a security to CFAT II (newly formed transaction
specific SPE).
The SLN conduit will fund its purchase of its interest in the security through the issuance of
SLNs
– ABN AMRO will provide a deal specific market value swap with a back to back market
value swap to Caterpillar Financial Services Corporation
– The security will be structured to a hard letter “AA/Aa2” rating
SLNs will be issued with an expected maturity of up to120 days. In the event of extension
(which has not occurred in the market to date), the notes would be extended and the
security would be sold in the market during the liquidation period.
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SLN Transaction Diagram
Servicing
A-1+/P-1
SLN Notes
Cash
Proceeds from the
issuance of SLNs
Certificate Cash
Note backed by
Certificate
Swap
Payments
Back to Back
MVS
Program Liquidity
(Covers a Market
Disruption for 3
days)
Program
Enhancement
Caterpillar Financial Asset Trust
(“Originator / Seller”)
Nightwatch Funding,
LLC
SLN Investors
Deal Specific
Market Swap
Provided by
ABN AMRO
Caterpillar
Financial Services
Corporation
(“Servicer”)
CFAT II
(Newly formed SPV)
ABN AMRO
ABN AMRO
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Market Value Swap Diagram
Pays all funds
due to SPV
Pays Issuer cost of
funds less credit
reduction factor
Pays any non credit related
shortfalls on
sale/securitization of the
assets
Pays gain on
sale/securitization of the
assets
Pays monthly interest
received on assets less
any required deposits
Pays all funds
received from
SPV
Caterpillar Financial
Services Corporation
(Back to Back
Swap Counterparty)
ABN AMRO
(Market Value Swap Provider
“Fronting Swap Counterparty”)
CFAT II
(SPV)
