01/07/2011

BofA Puts Conduit Biz on Indefinite Leave

Bank of America is officially out of the business of running commercial-paper conduits.

The Charlotte bank paid off all of its outstanding conduit paper within the last week or two, and shuttered all but one of its issuing vehicles. While the move didn't come as a total surprise — as managers at the institution had been debating doing just that in recent months — the speed at which they followed through with the plan caught industry players off guard.

Indeed, BofA still had billions of dollars of paper in the hands of investors just last month. Apparently, the bank's treasury officials rejected arguments by conduit-department staffers that their vehicles still offered an attractive means of financing clients' receivables.

Customers who maintained conduit facilities with BofA are still getting funding from the bank, which now is drawing on deposits and “receivable-purchase facilities” to supply the capital. It's unclear what will become of the institution's conduit-operations staff, led by Whit McDowell.

At its peak, BofA had as much as $50 billion of conduit paper outstanding at any given time and routinely ranked among the market's most active administrators. Like its peers, however, the bank's output was diminished by credit-crisis pressures and less-favorable accounting treatment that came with the implementation of the Financial Accounting Standards Board's FAS 166 and 167 rules a year ago.

According to the latest data available from Moody's, BofA had an average of $8.6 billion of conduit paper in the hands of investors during the third quarter. Its flagship vehicle, Ranger Funding, weighed in at $4.4 billion at the end of October — down from $7.4 billion at the end of August, according to S&P.

BofA's other conduits included Enterprise Funding, Kitty Hawk Funding and Yorktown Capital, along with the lesser-known Forrestal Certificate Funding Trust, Indomitable Funding and Ticonderoga Master Funding. The bank was looking at a plan around mid-2010 to merge some of those entities under the Ranger banner, but that effort apparently fell by the wayside amid internal debates about whether to remain in the business at all.

Like other conduit operators, BofA determined long ago that the regulatory-capital advantages of conduit financing vanished when the vehicles lost their former off-balance-sheet treatment due to FAS 166 and 167. Still, the bank figured until recently that conduits continued to make sense for some receivables from a funding-cost perspective.

Ultimately, the bank's treasury office concluded that deposits and receivable-purchase facilities would offer lower expenses. BofA is among a number of banks that are awash in deposits, and is looking for a way to put that capital to work. Receivable-purchase facilities also have attracted interest as a way for banks to deploy cash. Like conduits, the programs entail bankruptcy-remote special-purpose vehicles that buy client receivables. But rather than selling commercial paper, they draw on their sponsors' own money.

BofA's conduit team had been arguing that the bank should maintain at least some vestige of its presence in the sector. What they ended up with is likely to offer little consolation: One of the vehicles technically still exists, giving BofA the capacity to stage a quick return to market at some point down the line.

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