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JP Morgan Rivaling Citi in Conduit Business
Asset Backed Alert, Harrison Scott Publications Inc. (May 20, 2005)

J.P. Morgan Chase has emerged as the world's second-largest operator of commercial-paper conduits, establishing itself as a formidable rival to perennial market leader Citibank.

According to new figures released by Moody's, J.P Morgan's conduits had $49.8 billion of asset-backed paper in the hands of investors at yearend 2004, more than triple its $15.5 billion of outstandings on June 30 of that year. The second-half surge was almost entirely attributable to J.P. Morgan's July 1 purchase of Bank One, whose conduits were about twice the size of its acquirer's.

Despite the combination of the two conduit administrators, Citi maintained a comfortable lead. Citi's conduits had $56.3 billion outstanding at the end of last year, up about 5% in the second half.

Overall, the conduit business has come roaring back from its early 2004 doldrums. "We've been too conservative," said Debbie Seife, Fitch's conduit-rating manager, commenting on the agency's yearend prediction that outstandings would grow by up to 10% in 2005. According to the Federal Reserve Board, outstandings were at $786 billion this week, up 5% from $749 billion at yearend.

Fitch's prediction of a 10% increase would bring conduit outstandings to $824 billion by the end of this year. But market players now expect the figure to be substantially higher than that on Dec. 31.

Seife expects assets - mostly first-lien mortgages and home-equity loans - to continue pouring into conduits for the remainder of the year. Fitch expects this year's conduit growth to be fueled by the emergence of new mortgage-warehouse vehicles as well as non-bank players whose conduits employ repurchase agreements and extendible paper to fund their asset purchases. These options allow market players to hold down their credit-enhancement and liquidity costs.

Major banks are also expected to boost their issuance of extendible paper and develop repo conduits, following the lead of London-based BSN Capital Partners, whose conduits have grown rapidly so far this year - to more than $20 billion of outstandings. This year may also see more consolidation in the market, with bigger banks handling more assets and smaller operators either closing conduits or entering partnerships with others.

Industry insiders expect Ford Motor Credit to boost its involvement in the market following its recent downgrade, which made it more expensive to issue corporate bonds.

Among the top-15 conduit operators, Societe Generale's outstandings were among the biggest gainers during the second half of last year. Its outstandings jumped $8 billion, or 42%, during that period, after it took over the administrative reigns of Rhineland Funding Capital from CIBC World Markets. SocGen's increase came despite the fact that it was preparing to close its Trident Capital Finance earlier this year, according to Greg Medcraft, the bank's global structured-finance chief.



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