Citibank 2014 Annual Report Download - page 256

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Citi-Administered Asset-Backed Commercial Paper Conduits
The Company is active in the asset-backed commercial paper conduit
business as administrator of several multi-seller commercial paper conduits
and also as a service provider to single-seller and other commercial paper
conduits sponsored by third parties.
Citi’s multi-seller commercial paper conduits are designed to provide
the Company’s clients access to low-cost funding in the commercial paper
markets. The conduits purchase assets from or provide financing facilities to
clients and are funded by issuing commercial paper to third-party investors.
The conduits generally do not purchase assets originated by the Company.
The funding of the conduits is facilitated by the liquidity support and credit
enhancements provided by the Company.
As administrator to Citi’s conduits, the Company is generally responsible
for selecting and structuring assets purchased or financed by the conduits,
making decisions regarding the funding of the conduits, including
determining the tenor and other features of the commercial paper issued,
monitoring the quality and performance of the conduits’ assets, and
facilitating the operations and cash flows of the conduits. In return, the
Company earns structuring fees from customers for individual transactions
and earns an administration fee from the conduit, which is equal to the
income from the client program and liquidity fees of the conduit after
payment of conduit expenses. This administration fee is fairly stable, since
most risks and rewards of the underlying assets are passed back to the clients.
Once the asset pricing is negotiated, most ongoing income, costs and fees are
relatively stable as a percentage of the conduit’s size.
The conduits administered by the Company do not generally invest
in liquid securities that are formally rated by third parties. The assets are
privately negotiated and structured transactions that are generally designed
to be held by the conduit, rather than actively traded and sold. The yield
earned by the conduit on each asset is generally tied to the rate on the
commercial paper issued by the conduit, thus passing interest rate risk to the
client. Each asset purchased by the conduit is structured with transaction-
specific credit enhancement features provided by the third-party client seller,
including over collateralization, cash and excess spread collateral accounts,
direct recourse or third-party guarantees. These credit enhancements are
sized with the objective of approximating a credit rating of A or above, based
on the Company’s internal risk ratings. At December 31, 2014 and 2013, the
conduits had approximately $29.2 billion and $31.8 billion of purchased
assets outstanding, respectively, and had incremental funding commitments
with clients of approximately $15.3 billion and $13.5 billion, respectively.
Substantially all of the funding of the conduits is in the form of short-
term commercial paper. At the respective periods ended December 31, 2014
and 2013, the weighted average remaining lives of the commercial paper
issued by the conduits were approximately 57 and 67 days, respectively.
The primary credit enhancement provided to the conduit investors is in
the form of transaction-specific credit enhancements described above. One
conduit holds only loans that are fully guaranteed primarily by AAA-rated
government agencies that support export and development financing
programs. In addition to the transaction-specific credit enhancements, the
conduits, other than the government guaranteed loan conduit, have obtained
a letter of credit from the Company, which is equal to at least 8% to 10% of
the conduit’s assets with a minimum of $200 million. The letters of credit
provided by the Company to the conduits total approximately $2.3 billion as
of December 31, 2014 and 2013. The net result across multi-seller conduits
administered by the Company, other than the government guaranteed
loan conduit, is that, in the event defaulted assets exceed the transaction-
specific credit enhancements described above, any losses in each conduit are
allocated first to the Company and then the commercial paper investors.
The Company also provides the conduits with two forms of liquidity
agreements that are used to provide funding to the conduits in the event
of a market disruption, among other events. Each asset of the conduits is
supported by a transaction-specific liquidity facility in the form of an asset
purchase agreement (APA). Under the APA, the Company has generally
agreed to purchase non-defaulted eligible receivables from the conduit at par.
The APA is not generally designed to provide credit support to the conduit,
as it generally does not permit the purchase of defaulted or impaired assets.
Any funding under the APA will likely subject the underlying conduit clients
to increased interest costs. In addition, the Company provides the conduits
with program-wide liquidity in the form of short-term lending commitments.
Under these commitments, the Company has agreed to lend to the conduits
in the event of a short-term disruption in the commercial paper market,
subject to specified conditions. The Company receives fees for providing
both types of liquidity agreements and considers these fees to be on fair
market terms.
Finally, the Company is one of several named dealers in the commercial
paper issued by the conduits and earns a market-based fee for providing
such services. Along with third-party dealers, the Company makes a market
in the commercial paper and may from time to time fund commercial
paper pending sale to a third party. On specific dates with less liquidity in
the market, the Company may hold in inventory commercial paper issued
by conduits administered by the Company, as well as conduits administered
by third parties. Separately, in the normal course of business, the Company
invests in commercial paper, including commercial paper issued by the
Company’s conduits. At December 31, 2014 and 2013, the Company owned
$10.6 billion and $13.9 billion, respectively, of the commercial paper issued
by its administered conduits. The Company’s investments were not driven by
market illiquidity and the Company is not obligated under any agreement to
purchase the commercial paper issued by the conduits.
The asset-backed commercial paper conduits are consolidated by the
Company. The Company determined that, through its roles as administrator
and liquidity provider, it had the power to direct the activities that most
significantly impacted the entities’ economic performance. These powers
included its ability to structure and approve the assets purchased by the
conduits, its ongoing surveillance and credit mitigation activities, its ability
to sell or repurchase assets out of the conduits, and its liability management.
In addition, as a result of all the Company’s involvement described above,
it was concluded that the Company had an economic interest that could
potentially be significant. However, the assets and liabilities of the conduits
are separate and apart from those of Citigroup. No assets of any conduit are
available to satisfy the creditors of Citigroup or any of its other subsidiaries.