RBS 2008 Annual Report Download - page 141

Business review continued
RBS Group Annual Report and Accounts 2008140
The Group values the funding flexibility and liquidity provided by the
ABCP market to fund client- and Group-originated assets. Whereas
there are plans to decrease the multi-seller conduit business in line with
the Group’s balance sheet, the Group is reviewing the potential for new
own-asset conduit structures to add funding diversity.
Multi-seller conduits
The multi-seller conduits were established by the Group for the purpose
of providing its clients with access to diversified and flexible funding
sources. A multi-seller conduit typically purchases or funds assets
originated by the banks’ clients. The multi-seller conduits form the vast
majority of the Group’s conduit business (69.4% of the total liquidity
and credit enhancements committed by the Group). The Group
sponsors six multi-seller conduits which finance assets from Europe,
North America and Asia-Pacific.
Assets purchased or financed by the multi-seller conduits include auto
loans, residential mortgages, credit card receivables, consumer loans
and trade receivables. All assets held by the conduits are recorded on
the Group’s balance sheet either as loans and receivables or debt
securities.
The third-party assets financed by the conduits are structured with a
significant degree of first-loss credit enhancement provided by the
originators of the assets. This credit enhancement, which is specific to
each transaction, can take the form of over-collateralisation, excess
spread or subordinated loan, and typically ensures the conduit asset
has a rating equivalent to at least a single-A credit. In addition, and in
line with general market practice, the Group provides a small second-
loss layer of programme-wide protection to the multi-seller conduits.
Given the nature and investment grade equivalent quality of the first
loss enhancement provided to the structures, the Group has only a
minimal risk of loss on its program wide exposure. The issued ABCP is
rated P-1/A1 by Moody’s and Standard & Poor’s.
The Group provides liquidity back-up facilities to the conduits it
sponsors. These facilities can be drawn upon by the conduits in the
event of a disruption in the ABCP market, or when certain trigger events
occur such that ABCP cannot be issued. For a very small number of
transactions within two of the multi-seller conduits sponsored by the
Group these liquidity facilities have been provided by third-party banks.
This typically occurs on transactions where the third-party bank does
not use, or have, its own conduit vehicles. Conduit commercial paper
issuance is managed such that the spread of maturity dates of the
issued ABCP mitigates the short-term contingent liquidity risk of
providing back-up facilities. Limits sanctioned for such facilities as at 31
December 2008 totalled approximately £42.9 billion (2007 – £49.2 billion).
The Group’s maximum exposure to loss on its multi-seller conduits is
£43.2 billion (2007 – £49.4 billion), being the total amount of the
Group’s liquidity commitments plus the extent of programme-wide credit
enhancements which relate to conduit assets for whom liquidity facilities
were provided by third parties.
Own-asset conduits
The Group also holds three own-asset conduits which fund assets
which have been funded at one time by the Group. These vehicles
represent 25% of the Group’s conduit business (as a percentage of the
total liquidity and credit enhancements committed by the Group), with
£14.8 billion of ABCP outstanding at 31 December 2008 (2007 – £10.4
billion). The Group’s maximum exposure to loss on its own-asset
conduits is £15.9 billion (2007 – £13.5 billion), being the total drawn and
undrawn amount of the Group’s liquidity commitments to these
conduits.
Securitisation arbitrage conduits
The Group no longer sponsors any securitisation arbitrage conduits. As
part of the integration of ABN AMRO and a strategic review of the
conduit business, the sole securitisation arbitrage conduit was dissolved
in 2008. All of its assets were transferred to a centrally managed asset
unit for run-off or sale.
The Group’s exposure from both its consolidated conduits, including
those to which the Group is economically exposed and those which are
shared with the other consortium members, and its involvement with
third-party conduits are set out in the following table.