Citibank 2009 Annual Report Download - page 222

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The following table summarizes selected cash flow information related to
asset-based financing for the years ended December 31, 2009, 2008 and 2007:
In billions of dollars 2009 2008 2007
Cash flows received on retained interests
and other net cash flows $2.7 $1.7 $—
The effect of two negative changes in discount rates used to determine the
fair value of retained interests is disclosed below.
In millions of dollars
Asset-based
financing
Carrying value of retained interests $ 6,981
Value of underlying portfolio
Adverse change of 10% $ —
Adverse change of 20% (265)
Municipal Securities Tender Option Bond (TOB) Trusts
The Company sponsors TOB trusts that hold fixed- and floating-rate,
tax-exempt securities issued by state or local municipalities. The trusts are
typically single-issuer trusts whose assets are purchased from the Company
and from the secondary market. The trusts issue long-term senior floating
rate notes (Floaters) and junior residual securities (Residuals). The Floaters
have a long-term rating based on the long-term rating of the underlying
municipal bond and a short-term rating based on that of the liquidity
provider to the trust. The Residuals are generally rated based on the long-
term rating of the underlying municipal bond and entitle the holder to the
residual cash flows from the issuing trust.
The Company sponsors three kinds of TOB trusts: customer TOB trusts,
proprietary TOB trusts and QSPE TOB trusts.
Customer TOB trusts•฀ are trusts through which customers finance
investments in municipal securities and are not consolidated by the
Company. Proprietary and QSPE TOB trusts, on the other hand, provide
the Company with the ability to finance its own investments in municipal
securities.
Proprietary TOB trusts•฀ are generally consolidated, in which case the
financing (the Floaters) is recognized on the Company’s balance sheet as
a liability. However, certain proprietary TOB trusts are not consolidated
by the Company, where the Residuals are held by hedge funds that are
consolidated and managed by the Company. The assets and the associated
liabilities of these TOB trusts are not consolidated by the hedge funds
(and, thus, are not consolidated by the Company) under the application
of ASC 946, Financial Service—Investment Companies, which
precludes consolidation of owned investments. The Company consolidates
the hedge funds, because the Company holds controlling financial
interests in the hedge funds. Certain of the Company’s equity investments
in the hedge funds are hedged with derivatives transactions executed by
the Company with third parties referencing the returns of the hedge fund.
QSPE TOB trusts•฀ provide the Company with the same exposure as
proprietary TOB trusts and are not consolidated by the Company.
Credit rating distribution is based on the external rating of the municipal
bonds within the TOB trusts, including any credit enhancement provided by
monoline insurance companies or the Company in the primary or secondary
markets, as discussed below. The total assets for proprietary TOB Trusts
(consolidated and non-consolidated) includes $0.7 billion of assets where the
Residuals are held by a hedge fund that is consolidated and managed by the
Company.
The TOB trusts fund the purchase of their assets by issuing Floaters along
with Residuals, which are frequently less than 1% of a trust’s total funding.
The tenor of the Floaters matches the maturity of the TOB trust and is equal
to or shorter than the tenor of the municipal bond held by the trust, and the
Floaters bear interest rates that are typically reset weekly to a new market rate
(based on the SIFMA index). Floater holders have an option to tender the
Floaters they hold back to the trust periodically. Customer TOB trusts issue
the Floaters and Residuals to third parties. Proprietary and QSPE TOB trusts
issue the Floaters to third parties and the Residuals are held by the Company.
Approximately $2.2 billion of the municipal bonds owned by TOB trusts
have an additional credit guarantee provided by the Company. In all other
cases, the assets are either unenhanced or are insured with a monoline
insurance provider in the primary market or in the secondary market.
While the trusts have not encountered any adverse credit events as defined
in the underlying trust agreements, certain monoline insurance companies
have experienced downgrades. In these cases, the Company has proactively
managed the TOB programs by applying additional secondary market
insurance on the assets or proceeding with orderly unwinds of the trusts.
The Company, in its capacity as remarketing agent, facilitates the sale
of the Floaters to third parties at inception of the trust and facilitates the
reset of the Floater coupon and tenders of Floaters. If Floaters are tendered
and the Company (in its role as remarketing agent) is unable to find a new
investor within a specified period of time, it can declare a failed remarketing
(in which case the trust is unwound) or may choose to buy the Floaters
into its own inventory and may continue to try to sell it to a third-party
investor. While the level of the Company’s inventory of Floaters fluctuates,
the Company held none of the Floater inventory related to the customer,
proprietary and QSPE TOB programs as of December 31, 2009.
If a trust is unwound early due to an event other than a credit event
on the underlying municipal bond, the underlying municipal bond is
sold in the secondary market. If there is an accompanying shortfall in the
trust’s cash flows to fund the redemption of the Floaters after the sale of
the underlying municipal bond, the trust draws on a liquidity agreement
in an amount equal to the shortfall. Liquidity agreements are generally
provided to the trust directly by the Company. For customer TOBs where
the Residual is less than 25% of the trust’s capital structure, the Company