A consortium of leading global banks has agreed in principle to create and provide liquidity support to a master conduit to enhance liquidity in the market for asset-backed commercial pape
A consortium of leading global banks has agreed in principle to create and provide liquidity support to a master conduit to enhance liquidity in the market for asset-backed commercial paper and medium-term notes issued by structured investment vehicles. The move was prompted by the US Treasury Department.
Bank of America, Citigroup, JPMorgan Chase and several other financial institutions have agreed to create a single master liquidity enhancement conduit, known as M-LEC. Once established, M-LEC will agree, for a set period of time, to purchase qualifying highly-rated assets from certain existing SIVs that choose to take advantage of this new source of liquidity; it will not acquire bonds backed by sub-prime mortgages. Access to such liquidity is intended to allow participating sellers to meet pending redemptions and facilitate asset-backed commercial paper rollovers.
M-LEC will issue new short-term credit instruments to finance its purchase of eligible assets from participating sellers. The instruments issued by M-LEC are intended to benefit from various features, including a cushion of support from junior layers of capital and liquidity backstops. The size of the vehicle, the scope of the liquidity backstops, and the underlying cushion of capital are intended to enhance the liquidity and marketability of the short-term obligations of M-LEC.
The three named banks and other participating financial institutions will co-ordinate a process, the terms of which are still being finalised, for determining asset eligibility for M-LEC. A syndication process is currently underway to identify the liquidity backstops to include several additional financial institutions, in order to scale M-LEC to a size and funding structure deemed appropriate by the consortium.
M-LEC could be operational within 90 days, the partners say. Various investment management firms have been engaged in discussions with the consortium and expressed support for the plan. If the proposal is implemernted as planned, the conduit will be able to buy between USD75bn and USD100bn in bonds from SIVs.
The partners note that since late July refinancing in the asset-backed commercial paper markets has been difficult despite the high quality of collateral underlying many of these securities. The objective of M-LEC is to facilitate these refinancings and to complement other market-based solutions in supporting an orderly and efficient market environment.
