The general risk retention requirements will be applicable to all issuers of asset-backed securities (ABS) once the reproposed rules published by federal regulators on Aug. 28, 2013, become final and effective. (See our Holland & Knight alert, "Reproposed Credit Risk Retention Rules Will Affect All Issuers of Asset-Backed Securities," Sept. 27, 2013.) Included in the reproposed rules are provisions creating a separate risk retention option for issuers of asset-backed commercial paper (ABCP conduits). These provisions, if adopted as proposed, may affect the structures by which companies sell receivables to ABCP conduits.
Eligible ABCP Conduits Cannot Purchase Receivables
The separate risk retention option for ABCP conduits was created to reflect the unique structure of ABCP conduits. As an alternative to risk retention by the sponsor of the ABCP conduit with respect to each ABS asset sold to the ABCP conduit, the option provides that each originator/seller of ABS assets to the ABCP conduit retain risk with respect to the ABS asset it originates and sells to the ABCP conduit. The option will only be available for ABCP conduits that qualify as "eligible ABCP conduits." The advantages of not being required to retain credit risk at the sponsor level will provide a strong incentive for ABCP conduits to be structured (or restructured, in the case of existing ABCP conduits) as eligible ABCP conduits.
An eligible ABCP conduit is only permitted to purchase ABS and servicing assets. At present, certain companies finance their operations by selling their receivables directly to ABCP conduits. Since receivables are not ABS, it will no longer be possible for a company to finance its receivables by selling directly to an ABCP conduit that seeks to qualify as an eligible ABCP conduit. Accordingly, any company that currently funds its operation by selling receivables directly to an ABCP conduit that seeks to become an eligible ABCP conduit will be faced with selecting one of two alternatives:
- find another financing source for its receivables
- restructure its facility and take the steps required to issue (and retain the credit risk with respect to) ABS that can be purchased by an eligible ABCP conduit
What’s a Company to Do?
It may be that the initial reaction of many companies when faced with the prospect of issuing ABS (and retaining the related credit risk) in order to fund its operations through eligible ABCP conduits will be a negative one.
However, many companies in this situation should consider investing the effort required to be able to issue ABS to eligible ABCP conduits. If properly structured, the risk retention requirement imposed on the seller/originator under the eligible ABCP conduit option need not be incremental to the credit support otherwise required to be provided by the seller/originator to the conduit.
In addition, by conforming to the requirements of the eligible ABCP conduit option, a company will not only maintain its current low-cost funding, but it will also be able to use the securitization infrastructure it has created (with the proper built-in flexibility) to finance its assets in additional ways, thereby giving it an advantage over its competitors who choose not to conform.
Given the large number of companies that currently sell receivables directly to ABCP conduits, those companies that take a proactive approach to assess and address the likely impact of these rules well in advance of their effectiveness will avoid the last minute rush and be able to negotiate continued funding on their timetable.