Chariot Funding LLC. ABCP Program Review. Source: Moody s Investors Service

Transcription

1 Chariot Funding LLC CREDIT OPINION ABCP Program Review Update Ratings Exhibit 1 Chariot Funding LLC Closing Date Source: Moody s Investors Service November 2004 TABLE OF CONTENTS Ratings Summary Credit strengths Credit challenges Key characteristics Program overview Program description Program analysis Asset overview Asset description Asset analysis Methodology and monitoring ABCP program contact Program comparison Moody's related publications Summary Contacts Katrina Wong Associate Analyst katrina.wong@moodys.com Lisa Singman VP-Sr. Credit Officer/ Manager lisa.singman@moodys.com Rating rationale The Prime-1 (sf) rating assigned to the ABCP issued by Chariot is primarily based upon: Liquidity provided by Prime-1(cr) JPMorgan Chase Bank, N.A. (JPMCB), which typically funds for non-defaulted assets in case new ABCP can t be issued to repay maturing ABCP and reduces investor's exposure to credit risk to approximately 30 days; Program credit enhancement (PCE), in the form of a Letter of Credit (LOC) provided by Prime-1(cr) JPMCB, sized at the higher of (i) 5% of outstanding ABCP, (ii) 10% of outstanding ABCP (excluding ABCP related to fully support transactions and asset backed securities rated Aa2 or higher), and (iii) $500 million; Structural protections to ensure the bankruptcy remote structure of Chariot; The experience and capability of JPMCB as Administrator to ensure timely issuance and repayment of ABCP; The clearly defined requirements of Chariot s credit and investment policy regarding the qualification of assets and sellers for inclusion in Chariot's program on a prior and post review basis; and The asset quality of Chariot s portfolio, which reflects the experience and capability of JPMCB, as Administrator to recommend and monitor assets. Moody's reviews all assets that are not subject to post review status as defined in Chariot's credit and investment policy.

2 Credit strengths Liquidity support provided by Prime-1(cr) JPMCB; The amount of PCE available to support Chariot s ABCP; JPMCB, as conduit Administrator, Liquidity Agent and PCE provider, has demonstrated a strong commitment to the conduit by structuring and monitoring the credit profile of transactions in Chariot's portfolio; and The credit quality of Chariot s assets, which reflects a requirement that all assets comply with Chariot's credit and investment policies. Credit challenges The Prime-1 (sf) rating of Chariot is highly dependent on JPMCB s Prime-1(cr) counterparty risk assessment (CR Assessment). A change in JPMCB s CR Assessment would likely result in a change in the rating assigned to Chariot s ABCP. Key characteristics Part of our analysis when assigning a rating to the notes issued by an ABCP conduit, and on an ongoing basis, is to determine the appropriate reference point1 that accurately addresses the risk of the conduit. The following are the relative reference points for Chariot.2 Exhibit 2 Reference Points Source: Moody s Investors Service Exhibit 3 ABCP Notes Source: Moody s Investors Service This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Exhibit 4 Program Liquidity Source: Moody s Investors Service Exhibit 5 Program Credit Enhancement Source: Moody s Investors Service Exhibit 6 Program Assets Source: Moody s Investors Service 3

4 Program overview Chariot Funding LLC (Chariot) is a limited post review, partially supported multi-seller ABCP program sponsored and administered by JPMorgan Chase Bank, N.A. (JPMCB). In addition to Chariot, JPMCB administers another US multi-seller ABCP program, Jupiter Securitization Company, LLC. See Exhibit 8 for a comparison of each program. JPMCB also sponsors three single seller collateralized commercial paper (CCP) programs: Collateralized Commercial Paper Co., LLC, Collateralized Commercial Paper II Co., LLC, and Collateralized Commercial Paper III Co., LLC. CP issued by the CCP programs are rated Prime-1. Program description Structural diagram Exhibit 7 Structural Diagram SELLER Collections on previously transferred receivables Credit support payments Liquidity advances ABCP CONDUIT (Chariot Funding LLC) Fees Purchase price of new ABCP SELLER SELLER Advances against new receivables CREDIT ENHANCEMENT PROVIDER (JPMorgan Chase Bank) LIQUIDITY PROVIDERS (JPMorgan Chase Bank) Fees Payments on ABCP Fees Fees ISSUING & PAYING AGENT (Deutsche Bank Trust Company Americas) Purchase price of new ABCP Payments on ABCP ADMINISTRATOR (JPMorgan Chase Bank) ABCP INVESTORS SOLE SHAREHOLDER (48 Wall Street Holdco Services, Inc.) Source: Moody s Investors Service Description of notes Chariot finances its acquisitions of assets by issuing ABCP with a tenor limitation of up to 397 days from issuance. ABCP can be issued at a discount or on an interest bearing basis, and be fixed or floating rate notes. Additionally, the interest bearing notes can pay interest on interest payment dates that may not be the maturity date of the ABCP and the interest may be reset during the term of the notes. No notes will be issued if there is not sufficient liquidity to cover the principal amount of notes and interest to maturity. Callable notes, puttable notes, and extendible notes Chariot has the ability to issue Callable Notes, Puttable Notes, and Extendible Notes (collectively, Featured Notes). Puttable Notes have tenor limitations of up to 270 days from issuance, while Callable Notes and Extendible Notes have tenor limitations up to 397 days from issuance. Callable Notes are notes which may be redeemed in whole or in part at the conduit s option. Puttable Notes are notes which may be redeemed in whole or in part at the option of the investors. Extendible Notes are notes with (i) an expected maturity date and a 4

5 required final maturity date, which can be no later than 397 days from the date of issuance, and (ii) extendible maturity dates, at the option of the investor. The terms of the Featured Notes are reflected in the pricing supplement delivered to the investor. The Featured Notes may be issued (i) at a discount, or (ii) on an interest-bearing basis with a fixed-rate or floating rate of interest. The Administrator will calculate the interest component for floating rate notes. If there is any shortfall to pay ABCP interest, it is expected that JPMCB as Administrator and Calculation Agent would first draw on liquidity facilities then PCE to cover the shortfall when interest payments are due. JPM protects against foreign exchange risk When ABCP is issued for non-dollar denominated assets, Chariot will hedge foreign exchange exposure related to the asset-specific transactions. JPMCB, as Administrator, provides a broad indemnification for any hedging shortfalls that result from the implementation of the hedging agreements. Support to Chariot s ABCP program: liquidity support Chariot s ABCP is supported by asset-specific liquidity commitments in the form of liquidity asset purchase agreements (LAPA) provided by JPMCB. Chariot s liquidity may also be provided by other Prime-1(cr) banks. The commitment is equal to 102% of the facility limit allocable to Chariot under asset-specific documents. Liquidity is primarily structured to be partially supported. Any fully supported transactions will be noted in the Performance Overview that is published quarterly in moodys.com. For partially supported transactions, the available amount to be drawn may be less than the commitment amount. As in a typical partially supported liquidity facility, the amount available to be drawn (known as the Purchase Price) is equal to the amount of non-defaulted receivables or assets, and benefits from any asset-specific credit enhancement. To the extent that an underlying pool has defaults in excess of the asset-specific credit enhancement and liquidity will not pay par, any shortfall in funds would be made up by draws on the program credit enhancement. Chariot s liquidity commitments are structured to cover interest on ABCP through maturity, including interest required to be paid on any interest payment date for floating rate ABCP, seller recourse items, such as certain breaches of seller representations and warranties and dilution, and commingling risk, since funds collected but not yet remitted to Chariot are covered through liquidity. Chariot's liquidity typically does not front for recoveries expected to be received on certain asset types, given the risk transference mechanism in partially supported LAPAs. All partially supported LAPA's have a risk transference mechanism that springs into effect if certain trigger events at the asset-level are breached. The trigger events may include termination events, depletion in overcollateralization, or seller bankruptcy. Once a trigger is breached the Purchase Price will freeze and liquidity will be drawn when needed to repay ABCP. This structural feature prevents losses from eroding the level of available liquidity and effectively shifts the risk of loss associated with the assets, which reduces ABCP investors' exposure to credit risk to approximately one month. This risk transference mechanism is a strong feature of Chariot's liquidity structure. Liquidity support will not be available if Chariot were to become bankrupt. Support to Chariot s ABCP program: uncommitted program liquidity support Chariot s ABCP is also supported by an uncommitted program-level liquidity loan agreement (LLA) provided by JPMCB. The facility is sized at $2.7 billion. JPMCB may make advances to Chariot for payment of ABCP in the event of disruptions in the commercial paper market. Advances under the LLA rank pari passu with the interest of ABCP investors in terms of repayment. Liquidity will not be available if Chariot were to become bankrupt. Support to Chariot s ABCP program: program credit enhancement Chariot's program-level credit enhancement (PCE) is in the form of a letter of credit (LOC) provided by JPMCB. The PCE is fungible across all asset pools, and is available to repay ABCP, including interest on interest payment dates, to cover any interest shortfall related to floating rate notes, losses on any specific asset interest in excess of asset-specific credit enhancement and any amounts clawed back as preferential transfers. The LOC is generally not available to satisfy any unforeseen liabilities that Chariot may incur. The LOC is available in the unlikely event that Chariot were to become bankrupt. 5

6 The PCE will be increased each time a new partially supported asset interest is added to Chariot s portfolio. The amount required is equal to the higher of (i) 5% of outstanding ABCP or (ii) 10% of outstanding ABCP (excluding ABCP related to fully supported transactions, which are known as independent liquidity facilities, and asset backed securities rated Aa2 or higher). There is a minimum floor amount of $500 million. Bankruptcy remote structure Chariot is a special purpose limited liability company organized under the laws of Delaware. The sole member is Chariot Holding Corp. Chariot Holding Corp.'s sole shareholder is 48 Wall Street Holdco Services, Inc., who has contributed $100 of capital to Chariot and is not affiliated with Chariot, JPMCB or any of their subsidiaries or affiliates. All payments to the member are made in accordance with the program documents and are subordinate to the ABCP. Lord Securities Corporation is the manager of Chariot and is responsible for all corporate management services, including providing members, designating officers and attorneys, arranging meetings, filing tax returns and other financials, and providing office space and record keeping. Chariot remains a separate company from all parties it does business with. Chariot is structured to be bankruptcy remote. First, so long as any obligations are outstanding there must be unanimous consent from all directors, including the independent director, to place the conduit into bankruptcy and dissolve or liquidate the company, make any distributions or amend the program documents. There is also a requirement that there be at least one independent director. Second, the company is limited in its purpose. Chariot can only purchase assets in accordance with the program documents, issue notes and incur other liabilities in accordance with the program documents. Lastly, any parties that enter into any agreements with Chariot are required to agree not to put the conduit into bankruptcy for at least one year and one day after all ABCP has matured. Security interest Chariot grants to DBTCA, as the Trustee, a security interest in the program's assets for the benefit of the investors. In the unlikely event that Chariot were to become the subject of bankruptcy proceedings, ABCP investors and liquidity providers would receive a pro-rata share of collections on the underlying assets. Program administrator JPMCB is the Administrator of the Chariot ABCP program, and has been administering ABCP conduits since As Administrator, JPMCB is responsible for handling the day-to-day operations of the program. This includes, referring and arranging purchases of asset investments, monitoring assets in the portfolio, servicing the assets, and applying collections received from assets to repay expenses and fees of the conduit. JPMCB is also instrumental in administering various other aspects of Chariot's operations. These include determining the amount and tenor of ABCP to be issued based on the limitations defined within the program documents; giving instructions to the Issuing and Paying Agent (IPA) to issue ABCP; notifying the IPA if ABCP is to be called or if an investor requests ABCP to be put; assisting with the extension of the maturity date of extendible notes; arranging for banks to enter into liquidity agreements; notifying the liquidity agent of amounts needed to be drawn under liquidity agreements to repay ABCP; and drawing on the LOC. Issuing and paying agent DBTCA is the IPA for Chariot's ABCP. The IPA is primarily responsible for issuing and paying ABCP. This includes ensuring that proper accounts have been set up to deposit proceeds from the issuance of ABCP and repay ABCP. The IPA is responsible to enter all necessary information regarding the issued ABCP (amounts, interest rates, tenor, etc.) into the appropriate systems, and maintain necessary records for each note issued. They will withdraw amounts from the appropriate account to repay ABCP at the direction of Chariot and will notify the Administrator if there are insufficient amounts to repay any amounts due on the ABCP on a given day. Additionally, any proceeds from the support providers will be deposited into the commercial paper account held by the IPA in order for them to repay interest or principal on ABCP. If the IPA receives a notice related to a note being put from the holder of the note, they shall promptly notify Chariot. The IPA is required to notify the clearing system of all call, put, and extendible notices. All excess funds not needed to repay ABCP will be remitted to a conduit account held by JPMCB and placed in investments permitted pursuant to the program documents. No excess cash is held overnight with the IPA. 6

7 Trustee DBTCA is the Trustee for Chariot. As Trustee, DBTCA has a continuing security interest in all assets of Chariot for the benefit of ABCP investors. The collateral includes all cash received by the conduit, including ABCP proceeds, asset collections and investment earnings. Any excess cash may be invested daily in investments permitted under the program documents. Prior to a conduit default, JPMCB shall manage disbursements from conduit accounts to acquire assets and make payments in respect of ABCP and other fees and expenses of the conduit. The Trustee will exercise exclusive control over the conduit accounts if any of the following events occur: Chariot fails to make any material payment on ABCP when due, and such failure continues uncured for 30 days Bankruptcy of Chariot JPMCB fails to fund under a liquidity facility or the program credit enhancement when required, and such failure continues uncured for 30 days Wind-down events Chariot must cease issuing ABCP if any of the following events occur: 7 Amount of PCE is less than the minimum PCE amount required under the program documents for a period of 30 days after the Administrator is made aware of the event; Program LOC is not in full force and effect; Chariot violates certain covenants under its program documents (subject to certain grace periods); or Bankruptcy of Chariot.

8 Program analysis When assigning a rating to Chariot s ABCP our primary analysis focuses on the amount of liquidity and PCE available to help support the ABCP and the credit quality of the support providers. Our rating also reflects our analysis of Chariot s bankruptcy remote structure, and administrative and operational support. Primary analysis Liquidity support Liquidity support is provided by asset-specific liquidity commitments in the form of LAPAs provided by JPMCB. Therefore each asset interest has its own liquidity agreement, tailor made for that transaction. We will review the timing of when draws under liquidity are made, whether partially supported or fully supported. In all cases, draws need to be made on the same day, and at a specific time, to repay ABCP. For revolving transactions, and transactions for which Chariot is a committed purchaser, we look to see that liquidity is available to purchase additional assets in the event ABCP isn t issued. This helps reduce the risk of any lender liabilities, which potentially helps mitigate bankruptcy risk. We will review the Purchase Price for each LAPA to understand when liquidity is not available to fund, and determine whether these deductions (typically defaulted receivables or assets) are consistent with our current asset analysis. To the extent we feel there is an inconsistency or believe there could be potential losses we would look to the PCE for support. As mentioned above, liquidity will not be available if Chariot were to become bankrupt. Since Chariot is structured to be bankruptcy remote, this out to liquidity is consistent with the Prime-1 (sf) rating of Chariot s ABCP. Uncommitted program liquidity loan agreement The uncommitted program-level LLA is an uncommitted revolving liquidity facility provided by JPMCB. Since JPMCB is not contractually committed to use this liquidity facility, we do not rely on this additional support in our analysis. However, it is available as an additional form of liquidity and is a benefit to investors if drawn upon. Program credit enhancement Another strength of the program is PCE. There is one form of PCE available to Chariot. The PCE can be drawn at any time by the Administrator. We reviewed the timing to ensure that payments are made on the same day needed to repay maturing ABCP and that no outs or deductions in the amount drawn occur. The required level of PCE must be maintained at all times and can never fall below the minimum floor amount of $500 million. This floor amount is designed to provide additional protection to ABCP investors for losses incurred during a ramp up or at the end of a program wind down period to cover any tail-end risk. Dependency on JPM's credit quality Significant reliance is placed on JPMCB to provide liquidity and credit support and to act as Administrator of Chariot. Therefore, the Prime-1 (sf) rating assigned to the program's ABCP is highly dependent on the assessment or rating of the reference point assigned to JPMCB. Currently, the CR Assessment is our reference point for JPMCB, as liquidity and PCE provider. The CR Assessment is Prime-1(cr). A change in JPMCB s CR Assessment would likely result in a change in the rating assigned to Chariot s ABCP. Additional analysis Bankruptcy remoteness We reviewed Chariot s program and corporate documents to ensure that Chariot is structured to be bankruptcy remote. This structure is necessary to achieve a Prime-1 (sf) rating. Bankruptcy risk takes three forms, all of which need to be mitigated: voluntary bankruptcy, involuntary bankruptcy and substantive consolidation. The risk of voluntary bankruptcy is mitigated by having unanimous consent from all directors to place the conduit into bankruptcy, dissolve or liquidate the company, make any distributions or amend the program documents. No one person could ever determine the fate of the company. Limiting the company s purpose and ensuring that all documents contain non-petition and excess funds language reduces the risk of a third party filing a petition against the company, hence reducing the risk of involuntary bankruptcy. 8

9 Chariot is a separate company from the parties it does business with, which reduces any risk of Chariot consolidating with these companies in the unlikely event one of them were to become bankrupt. Our review of Chariot s structure, the mitigants and structural protections are common across all ABCP programs rated by Moody s.3. Security interest The Trustee has a security interest in the program's assets for the benefit of the investors. In Moody's opinion, a security interest in the assets is a strong feature of the program; however, because the Prime-1 (sf) rating addresses timeliness of payment, the security interest does not add any significant benefit from a short-term rating perspective. The security interest would likely reduce investors' losses under the extremely remote instance of Chariot's bankruptcy. Operational risk Administrator: We view JPMCB in its role as Administrator as a strength. Chariot is a shell company with no employees. All of its operational functions are outsourced to other parties. JPMCB, as Administrator, plays a major part in the operational functions of Chariot both on the asset and liability ends of the business. JPMCB has been the conduit Administrator for Chariot since inception in 2004 and has proven to be committed to this business and Chariot. The assets selected and added to the program are of good credit quality and structured to a level consistent with the rating of the ABCP. Conduit surveillance reports are received on a timely basis and include all necessary information needed to monitor the conduit and individual asset performance. There is a sufficient staff in place that is available when needed to address any questions and the proper systems in place to continually run the Chariot ABCP program. The Administrator performs duties under this program with the same degree of care that it exercises in connection with its own or similar business and with the same standard of care as would be exercised by a prudent person in connection with the administration of similar operations. Additionally, JPMCB indemnifies Chariot from and against any and all losses, liabilities and expenses resulting from the failure of the Administrator to perform its duties or obligations in accordance with the program documents. JPMCB has a long term issuer rating and commercial paper rating of Aa3 and Prime-1, respectively, and a CR Assessment of Aa2(cr)/Prime-1(cr). Therefore, this indemnification is strong and consistent with the rating of the ABCP. Incentive structure for JPM: JPMCB s interests are often aligned with the holders of ABCP in ensuring the best possible performance and management of the conduits. This incentive structure plays a role in determining the likelihood that operational risk will materialize. Chariot has set up this ABCP program as a permanent operating vehicle to fund its clients assets. Liquidity and PCE are also provided by JPMCB. The market place tends to associate Chariot with JPMCB, meaning that a problem at the conduit level will expose the sponsor to potential reputational risk. Also, as support provider, JPMCB takes on the same or even more risk than ABCP investors. Issuing and paying agent DBTCA is the IPA for Chariot. DBTCA has proven to be highly reliable and experienced at this role. The reference point used for the IPA is the CR Assessment. DBTCA has a Prime-2(cr) assessment. All excess funds not needed to repay ABCP will be forwarded to a conduit account held by JPMCB and invested in permitted investments. No cash will remain with the IPA overnight. Therefore the current CR Assessment is consistent with the Prime-1 (sf) rating assigned to Chariot s ABCP.4 Trustee The primary functions of the Trustee takes effect once the conduit defaults. Therefore DBTCA, as Trustee is not material to our analysis when assigning the Prime-1 (sf) rating. 9

10 Asset overview Chariot is a partially supported ABCP conduit. Similar to other partially supported conduits, the credit quality of Chariot s assets must be consistent with the rating of Chariot s ABCP. This can be achieved on a stand-alone basis, or after considering the impact of liquidity, PCE or the portfolio management. Asset description Limitations on purchases Chariot is not limited to purchasing any particular types of receivables. Instead, Chariot targets a wide variety of asset and industry types from a variety of sellers and originators. There is no rating or size requirement for sellers of assets to Chariot. However, there are limitations that must be met in order to be added to Chariot on a post review basis. Limited post review status Chariot is a limited post review conduit, meaning that some of the assets are added on a post review basis. Certain asset interests that do not meet Chariot s post review criteria will be reviewed prior to being added. In addition to new asset pools, post review status will include any amendments and renewals to existing transactions that meet the criteria below. Post review status is available to asset interests that meet the following criteria: Transactions with investment-grade rated originator/seller (rated Baa3 or higher), up to $1 billion in commitments; Transactions with below investment-grade rated originator/seller (rated Ba1 or lower), up to $500 million in commitments; Interest rate and currency risk exposure must be fully hedged and JPMCB will indemnify Chariot against losses due to improper hedging; Transactions supported by fully supported liquidity facilities, no commitment limitations; and Chariot may enter into amendments that enhance its credit position in a transaction without prior review. Examples of such a change would be more restrictive eligible receivable criteria or more restrictive covenants such as tighter performance triggers. All asset interests that fail to meet the post review criteria will continue to be reviewed by Moody s prior to the transaction being added to Chariot s portfolio. Asset analysis We believe JPMCB's experience as conduit administrator, and its track record in structuring certain types of deals for Chariot warrants this limited post review status. Additionally, partially supported transactions include provisions for liquidity to be drawn if certain asset-specific liquidity events occur. This has the effect of reducing the amount of credit risk faced by ABCP investors in the event of a deterioration in the credit quality of these specific asset pools. Chariot s PCE has also historically been large, and higher than the majority of transactions in the portfolio. Post review does not mean no review. An asset-level credit analysis is done for most partially supported transactions in Chariot to ensure that the credit quality of each transaction is consistent with the current rating of Chariot s ABCP. This review takes into consideration asset-specific credit enhancement, structural features including concentration limits and portfolio triggers, liquidity support and PCE. For information on the current assets in Chariot and portfolio performance of the largest assets, please see the most recent Performance Overview on Moody s website: 10

11 Methodology and monitoring The rating methodologies used for this ABCP program are described in the publications listed below. ABCP programs rated by Moody s are monitored and analyzed on an ongoing basis. Some programs have monthly updated performance information, which is published in the Performance Overviews. The methodologies and performance overviews are available on Moody s website: ABCP program contact Elaine Lo Conduit Management J.P. Morgan Securities LLC elaine.y.lo@jpmorgan.com Kelsey Thomas J.P. Morgan Securities LLC kelsey.a.thomas@jpmorgan.com 11

12 Program comparison Exhibit 8 Comparison of JPMorgan-Sponsored ABCP Programs Source: Moody s Investors Service 12

13 Moody's related publications For a more detailed explanation of Moody s approach to this type of transaction as well as similar transactions please refer to the following report: Rating methodology: Moody s Approach to Rating Asset-Backed Commercial Paper, July 2017 (SF408181) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Moody s publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at 13

14 Endnotes 1 See our complete list of reference points for all ABCP programs globally, which can be accessed with this link 2 See our methodology, Moody s Approach to Rating Asset-Backed Commercial Paper for more information, which can be access with this link. 3 Bankruptcy Remoteness Criteria for Special Purpose Entities in Global Structured Finance Transaction (October 2014) 4 Moody's Approach to Assessing Counterparty Risks in Structured Finance (July 2017) 14

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MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER

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