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Tags: abn amro, acronyms, appendix, asset backed securities, assets, collateralised debt obligations, commercial mortgage backed securities, conduits, credit enhancement, disclosures, exposures, guarantors, information contents, leverage finance, loan obligations, mortgage backed securities, portfolios, residential mortgage backed securities, special purpose entity, spes,Pages: 13
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Created: Fri Aug 8 06:22:15 2008
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Appendix 2
Credit market and related exposures additional information
Contents
Section Page
1. Explanatory note 2
2. Background 2
3. Valuation 2
4. Mortgage and other asset-backed exposures 3
5. Financial guarantors 9
6. Leverage finance 10
7. SPEs and conduits 11
Note: the following acronyms are used in this supplement
ABS Asset-backed securities
CDO Collateralised debt obligations
CLO Collateralised loan obligations
CP Commercial paper
CMBS Commercial mortgage-backed securities
GSE Government Sponsored Entity
PWCE Programme-wide credit enhancement
RMBS Residential mortgage-backed securities
SPE Special purpose entity
Page 1 of 13
Appendix 2
Credit market and related exposures additional information
1. Explanatory note
The disclosures in this appendix supplement the information about credit market exposures given on pages 42 and 43. Additionally they include disclosures
on the Group's involvement with conduits. The disclosures have been prepared on a pro forma basis including only those ABN AMRO businesses to be
retained by the Group and portfolios within shared assets allocated to it and reflect the recommendations in the Report of the Financial Stability Forum on
Enhancing Market and Institutional Resilience.
2. Background
Widespread disruption in the financial markets was triggered in the late summer of 2007 by the accelerating deterioration in the US sub-prime mortgage
market. Financial institutions recorded significant losses on complex structured securities. As market participants sought to reduce their leverage, there was
increased appetite for liquid securities and many credit markets became illiquid. Markets remain dislocated and investor appetite for credit market exposures
has yet to recover. The Group's businesses, in particular GBM, retain exposures to US sub-prime residential mortgage assets and to commercial mortgages
mainly through its US securitisation activities. It also has exposure to monoline insurers where it has bought protection on asset-backed positions and it is
also an active participant in the leveraged finance markets in the Americas and Europe. The Group's retail businesses have major mortgage franchises in the
UK and the US.
3. Valuation
Financial instruments classified as held-for-trading, designated as at fair value through profit or loss and available-for-sale are recognised at fair value. All
derivatives are measured at fair value. The Group's approach to determining the fair value of financial instruments is described in Critical accounting policies
and key sources of estimation uncertainty on pages 132 to 135 of the Group's 2007 accounts.
Certain financial instruments have been valued using valuation techniques where at least one input (which could have a significant effect on the instrument's
valuation) is not based on observable market data (see page 90). At 30 June 2008 such financial assets amounted to £28.3 billion (2007 - £32.7 billion) and
financial liabilities to £6.1 billion (2007 - £15.3 billion). Using reasonably possible alternative assumptions for the valuation of these financial instruments could
result in fair value losses of up to £750 million or fair value gains of up to £900 million.
Page 2 of 13
Appendix 2
4. Mortgage and other asset-backed exposures
4.1 ABS CDO exposures super senior tranches
The Group had a leading position in structuring, distributing and trading ABS. These activities included buying mortgage-backed securities, including
securities backed by US sub-prime mortgages, and repackaging them into collateralised debt obligations for sale to investors. The Group retained significant
holdings of super senior positions in CDOs. These positions represent the most senior positions in the CDO and, at the time of structuring, were senior to
tranches rated AAA by independent rating agencies. However, since the inception of these transactions, the subordinate positions have diminished
significantly in value and rating and, as a result, the super senior tranches of the CDOS now have greater risk of loss, based on current market assumptions
concerning mortgage delinquencies and house prices in the US. Details of the Group's net held-for-trading exposures to these CDOs are set out below.
30 June 2008 31 December 2007
High grade Mezzanine Total High grade Mezzanine Total
£m £m £m £m £m £m
Gross exposure 6,470 3,062 9,532 6,420 3,040 9,460
Hedges and protection (3,380) (1,262) (4,642) (3,347) (1,250) (4,597)
Net exposure 3,090 1,800 4,890 3,073 1,790 4,863
Fair value adjustment (1,482) (1,439) (2,921) (492) (537) (1,029)
Net exposure after hedges 1,608 361 1,969 2,581 1,253 3,834
% % % % % %
% of underlying RMBS sub-prime assets (a) 69 91 79 69 91 79
Of which originated in:
2005 and earlier 24 23 24 24 23 24
2006 28 69 46 28 69 46
2007 48 8 30 48 8 30
Collateral by rating (b):
AAA 25 - 15 36 - 23
BBB- and above 44 10 29 62 31 51
Non-investment grade 31 90 56 2 69 26
Attachment point 29 46 35 29 46 35
Attachment point post write down 63 89 73 40 62 50
(a) at origination.
(b) rating is determined with reference to S&P ratings where available. Where S&P ratings are not available the lower of Moody's and Fitch ratings have
been used.
Page 3 of 13
Appendix 2
The valuation of the Group's super senior ABS CDO exposures takes into consideration outputs from a proprietary model, market data and appropriate
valuation adjustments. Valuation involves significant subjectivity; there is very little market activity to provide evidence of the price at which willing buyers and
sellers would transact. The Group's proprietary model models the expected cash flows from the underlying mortgages using assumptions, derived from
publicly available data, about future macroeconomic conditions (including house price appreciation and depreciation) and about defaults and delinquencies on
these underlying mortgages. The resulting cash flows are discounted using a risk adjusted rate.
4.2 Mortgage and other asset-backed securities
The table below analyses the Group's mortgage and other asset-backed securities, a proportion of the Group's overall portfolio of debt securities (pages 56
and 57) by measurement classification and underlying asset type.
RMBS CMBS CDOs / CLOs Other ABS Total
Sub-prime Non conforming Prime
30 June 2008 Agency Other
£m £m £m £m £m £m £m £m
AAA rated
Held-for-trading 741 1,553 19,160 11,052 2,774 6,741 4,750 46,771
Available-for-sale 131 1,458 11,148 14,798 1,589 1,822 4,784 35,730
Other - - - - 448 - - 448
872 3,011 30,308 25,850 4,811 8,563 9,534 82,949
BBB- and above
Held-for-trading 1,254 114 - 841 550 966 2,606 6,331
Available-for-sale - 8 - 19 10 - 96 133
Other - - - - 497 3 - 500
1,254 122 - 860 1,057 969 2,702 6,964
Non-investment grade
Held-for-trading 378 77 - 20 31 587 145 1,238
Available-for-sale - - - - - 4 10 14
378 77 - 20 31 591 155 1,252
Not publicly rated
Held-for-trading 570 66 - 93 515 1,468 1,503 4,215
Available-for-sale - - - - 31 6 457 494
Other 24 - - - 122 3 224 373
594 66 - 93 668 1,477 2,184 5,082
Total
Held-for-trading 2,943 1,810 19,160 12,006 3,870 9,762 9,004 58,555
Available-for-sale 131 1,466 11,148 14,817 1,630 1,832 5,347 36,371
Other 24 - - - 1,067 6 224 1,321
Total 3,098 3,276 30,308 26,823 6,567 11,600 14,575 96,247
Page 4 of 13
Appendix 2
RMBS CMBS CDOs / CLOs Other ABS Total
Sub-prime Non conforming Prime
31 December 2007 Agency Other
£m £m £m £m £m £m £m £m
AAA rated
Held-for-trading 1,239 2,236 19,824 9,373 2,537 8,321 4,548 48,078
Available-for-sale 132 1,261 10,366 1,610 1,358 1,821 1,580 18,128
Other - - - - 157 - - 157
1,371 3,497 30,190 10,983 4,052 10,142 6,128 66,363
BBB- and above
Held-for-trading 2,576 428 - 535 470 763 1,671 6,443
Available-for-sale 2 18 - - - - 116 136
Other - - - - 519 16 - 535
2,578 446 - 535 989 779 1,787 7,114
Non-investment grade
Held-for-trading 593 153 - 21 35 922 151 1,875
Available-for-sale 16 - - - - - 84 100
Other 5 - - - - - - 5
614 153 - 21 35 922 235 1,980
Not publicly rated
Held-for-trading 975 170 - 118 446 2,113 2,239 6,061
Available-for-sale - - - - 9 8 301 318
Other - - - - 144 2 185 331
975 170 - 118 599 2,123 2,725 6,710
Total
Held-for-trading 5,383 2,987 19,824 10,047 3,488 12,119 8,609 62,457
Available-for-sale 150 1,279 10,366 1,610 1,367 1,829 2,081 18,682
Other 5 - - - 820 18 185 1,028
Total 5,538 4,266 30,190 11,657 5,675 13,966 10,875 82,167
(a) Agency securities comprise US federal agency securities and securities issued by GSEs. The Group's exposure to subordinated debt and preferred classes
of these entities and agencies is limited (less than £50 million).
(b) CMBS comprises UK: £1,849 million (2007: £1,077 million); US: £3,400 million (2007: £3,572 million), including £1,194 million issued by federal agencies;
Europe: £1,273 million (2007: £976 million); rest of the world: £45 million (2007: £50 million).
(c) The held-for-trading portfolios represent GBM's activities in structuring, distributing and trading asset-backed securities. The majority of these assets are
hedged with financial guarantors (see section 6).
(d) The available-for-sale portfolio principally comprises securities held by Citizens as part of its balance sheet management.
Page 5 of 13
Appendix 2
The table below sets out the Group's direct exposure to US RMBS included above:
30 June 2008 31 December 2007
Agency Other prime Alt-A Sub-prime Total Agency Other prime Alt-A Sub-prime Total
Book value £m £m £m £m £m £m £m £m
Held-for-trading 19,160 1,241 1,019 2,318 23,738 19,824 1,383 2,118 3,807 27,132
Available-for-sale 11,148 1,442 575 - 13,165 10,366 1,272 640 - 12,278
30,308 2,683 1,594 2,318 36,903 30,190 2,655 2,758 3,807 39,410
Of which originated in:
- 2005 and earlier 1,021 1,415 1,165 2,241
- 2006 226 692 630 1,444
- 2007 and later 347 211 963 122
1,594 2,318 2,758 3,807
Net exposure
Held-for-trading 19,160 843 803 257 21,063 19,824 794 2,233 1,292 24,143
Available-for-sale 11,148 1,391 575 - 13,114 10,366 1,272 640 - 12,278
30,308 2,234 1,378 257 34,177 30,190 2,066 2,873 1,292 36,421
Agency comprises federal agencies and GSEs
4.3 Other mortgage-backed exposures
The Group's whole loans and warehouse facilities collateralised by mortgages are analysed below.
30 June 2008 31 December 2007
Whole loans Warehouse facilities Whole loans Warehouse facilities
£m £m £m £m
Prime 197 1,505 453 575
Commercial 1,456 896 2,200 900
Non-conforming 39 1,188 57 1,445
Sub-prime 35 - 97 -
1,727 3,589 2,807 2,920
Page 6 of 13
Appendix 2
4.4 US residential mortgages
Citizens' `Serviced By Others' (SBO) portfolio of residential mortgages by indexed valuation LTV (based on Case-Shiller property index) and type of mortgage
is set out below:
30 June 2008 31 December 2007
Sub-prime Alt-A Prime Total Sub-prime Alt-A Prime Total
100% 3 390 1,987 2,380 2 195 1,556 1,753
4 774 3,033 3,811 2 856 3,323 4,181
5. Financial guarantors
Significantly all of the Group's exposures to financial guarantors relates to monolines insurers (monolines) who specialise in providing guarantees on bond
defaults. The exposure arises from over the counter derivative contracts principally credit default swaps (CDS). Direct exposure to monolines is the sum of
the fair values of the CDSs. As the fair value of the protected assets declines the exposure to the guarantor increases. The Group's net exposure to
monolines and the related credit valuation adjustment are as follows:
30 June 2008 31 December 2007
£m £m
Gross exposure to monolines 6,343 3,409
Hedges with bank counterparties (715) -
Credit valuation adjustment (3,230) (862)
Net exposure to monolines 2,398 2,547
Page 7 of 13
Appendix 2
The Group's direct exposures to monolines, by credit rating* and protected asset type is shown below:
30 June 2008 31 December 2007
Fair value of Gross Fair value of Gross
Notional protected assets exposure Notional protected assets exposure
£m £m £m £m £m £m
AAA / AA rated
RMBS and CDO of RMBS 2,850 1,258 1,592 5,049 3,079 1,970
CMBS 632 579 53 3,731 3,421 310
CLOs 5,655 5,053 602 9,941 9,702 239
Other ABS 1,298 1,134 164 4,553 4,388 165
Other 284 167 117 622 516 106
10,719 8,191 2,528 23,896 21,106 2,790
A / BBB rated
RMBS and CDO of RMBS 1,951 802 1,149 - - -
CMBS 3,150 2,433 717 - - -
CLOs 3,945 3,697 248 - - -
Other ABS 627 505 122 - - -
Other 173 124 49 - - -
9,846 7,561 2,285 - - -
Sub-investment grade
RMBS and CDO of RMBS 1,214 121 1,093 918 453 465
CLOs 274 257 17 - - -
Other ABS 887 763 124 - - -
Other 449 153 296 154 - 154
2,824 1,294 1,530 1,072 453 619
Total
RMBS and CDO of RMBS 6,015 2,181 3,834 5,967 3,532 2,435
CMBS 3,782 3,012 770 3,731 3,421 310
CLOs 9,874 9,007 867 9,941 9,702 239
Other ABS 2,812 2,402 410 4,553 4,388 165
Other 906 444 462 776 516 260
23,389 17,046 6,343 24,968 21,559 3,409
* based on Moody's
One of the monoline insurers, ACA Capital Insurance, is subject to a creditor agreement following a near default. The exposures to this counterparty have
been fully marked down.
Page 8 of 13
Appendix 2
GBM and some of the Group's conduits also have indirect exposure through wrapped securities which have an intrinsic credit enhancement from a monoline
insurer. These securities are traded with the benefit of this credit enhancement and therefore any deterioration in the credit rating of the monoline is reflected
in the market prices for these securities.
6. Leverage finance
The Group's syndicated loans represent amounts retained from syndications where the Group was lead manager or underwriter, in excess of the Group's
intended long term participation. Lending facilities in GBM's leverage finance franchise represents a significant proportion of the Group's syndicated facilities.
Net leverage finance exposures by industry and geography are as follows:
30 June 2008 31 December 2007
US UK Europe ROW Total US UK Europe ROW Total
£m £m £m £m £m £m £m £m £m £m
TMT* 4,518 696 472 3 5,689 6,848 424 483 25 7,780
Retail 178 491 784 152 1,605 542 1,303 889 49 2,783
Industrial 209 1,541 945 23 2,718 249 2,018 983 45 3,295
Other 132 483 136 26 777 25 339 271 13 648
5,037 3,211 2,337 204 10,789 7,664 4,084 2,626 132 14,506
Of which:
Loans 687 2,422 2,097 170 5,376 2,073 4,025 2,477 123 8,698
Commitments to lend 4,350 789 240 34 5,413 5,591 59 149 9 5,808
5,037 3,211 2,337 204 10,789 7,664 4,084 2,626 132 14,506
*telecommunications, media and technology
All the above are classified as held-for-trading except for £2,257 million (2007 - £2,541 million) classified as loans and receivables. The movement in the
period comprised:
Total
£m
At 1 January 2008 14,506
Additions 1,887
Sales (4,405)
Hedges (336)
Write-downs (863)
At 30 June 2008 10,789
A further £1.25 billion leverage loans were sold in July 2008.
Page 9 of 13
Appendix 2
Credit market and related exposures additional information
Syndicated loans are valued by considering recent syndication prices in the same or similar assets, prices in the secondary loan market, and with reference to
relevant indices for credit products and credit default swaps such as the LevX, LCDX, ITraxx and CDX. Assumptions relating to the expected refinancing
period are based on market experience and market convention.
7. SPEs and conduits
7.1 SPEs
In the normal course of business, the Group arranges securitisations to facilitate client transactions and undertakes securitisations to sell financial assets or to
fund specific portfolios of assets. For a description of the Group's securitisations,see Note 30 of the 2007 accounts. There have been no material changes
since the year end.
7.2 Conduits
The Group sponsors and administers a number of multi-seller asset-backed commercial paper ("ABCP") conduits. The Group consolidates these conduits as
it is exposed to the majority of the risks and rewards of ownership of these entities.
The multi-seller conduits have been established by the Group for the purpose of providing its clients access to alternative and flexible funding sources. The
third party assets financed by the conduits are structured with a significant degree of first loss credit enhancement provided by the originators of the assets.
This credit enhancement can take the form of transaction specific over-collateralisation, excess spread or originator provided subordinated loans. The Group
provides a second loss layer of programme wide protection to the multi-seller conduits, however given the nature and investment grade equivalent quality of
the first loss enhancement provided to the structures, the Group has only a minimal risk of loss on its total exposure. The ABCP issued by the conduits
themselves is rated at A1 or A1+/P1 levels.
In addition to the PWCE, the Group provides liquidity back-up facilities to its own conduits. The short-term contingent liquidity risk in providing such backup
facilities is mitigated by the spread of maturity dates of the commercial paper issued by the conduits. Limits sanctioned for such facilities at 30 June 2008
totalled approximately £44.5 billion (2007 - £46.3 billion). These liquidity facilities are sanctioned on the basis of total conduit purchase commitments and will
therefore exceed the level of CP funded assets as at 30 June 2008.
During the difficult market conditions since August 2007, the multi-seller conduits were generally able to continue to issue rated CP albeit at generally shorter
maturities and higher price levels than previously. There was an increased shortage of market liquidity, particularly in November and December, for longer
dated issuance (i.e. over 1 month) as the year end approached. During the first half of 2008, ABCP market conditions have stabilised, with more liquidity
returning to the market and the cost of CP issuance returning to levels only slightly above historic norms. Investors continue to distinguish between the
stronger multi-seller conduits and weaker second tier and arbitrage conduits, with both ABN AMRO and RBS sponsored conduits falling principally into the
former category and with both experiencing the improved market conditions. RBS and RBS Greenwich Capital Markets act as dealers to the RBS sponsored
conduits' CP issuance programmes and have purchased CP in that capacity but such holdings have not generally been material. ABN AMRO Bank and ABN
AMRO Corp act as dealers to the ABN AMRO sponsored programmes and have held generally non material CP on inventory.
Page 10 of 13
Appendix 2
The Group's exposure from both its consolidated conduits and its involvement with third party conduits are set out below:
30 June 2008 31 December 2007
Own conduits Third party Total Own conduits Third party Total
conduits conduits
£m £m £m £m £m £m
Total assets held by the conduits 32,866 31,103
Commercial paper issued 31,767 31,103
Liquidity and credit enhancements
- deal specific liquidity facilities - drawn 1,099 2,296 3,395 - 2,280 2,280
- deal specific liquidity facilities - undrawn 40,820 528 41,348 43,761 490 44,251
- programme-wide liquidity 151 438 589 75 807 882
- PWCE 2,530 - 2,530 2,915 - 2,915
44,600 3,262 47,862 46,751 3,577 50,328
Maximum exposure to liquidity* 41,531 3,262 44,793 42,894 3,577 46,471
*The maximum exposure to liquidity represents committed facilities but as not all facilities can be drawn at the same time, the maximum exposure to liquidity
will not be the total of all such facilities.
Page 11 of 13
Appendix 2
Credit market and related exposures additional information
The Group's exposure from both its consolidated conduits and its involvement with third party conduits are set out below:
Exposures CP funded assets
Geographic distribution Credit ratings
CP funded Total Below
assets Undrawn exposure UK Europe US ROW Total AAA AA A BBB BBB
30 June 2008 £m £m £m £m £m £m £m £m £m £m £m £m £m
Credit card receivables 4,608 800 5,408 599 - 4,009 - 4,608 957 378 3,088 185 -
Consumer loans 1,960 335 2,295 575 819 566 - 1,960 652 551 752 5 -
Auto loans 7,052 1,596 8,648 1,240 1,158 4,385 269 7,052 592 1,653 4,807 - -
Trade receivables 3,646 1,901 5,547 149 1,332 1,914 251 3,646 80 876 2,387 175 128
Student loans 2,037 476 2,513 138 - 1,899 - 2,037 328 181 1,528 - -
Floorplan 1,103 41 1,144 - 266 837 - 1,103 841 150 112 - -
CDOs 104 27 131 - 104 - - 104 104 - - - -
Commercial mortgages 1,127 18 1,145 715 - 25 387 1,127 323 522 266 16 -
Residential mortgages - -
Prime 4,894 956 5,850 - 188 - 4,706 4,894 97 1,982 2,815 - -
Buy-to-let - - - - - - - - - - - - -
Non-conforming 2,515 943 3,458 1,565 950 - - 2,515 395 1,475 645 - -
Sub-prime - - - - - - - - - - - - -
Other 3,820 1,705 5,525 524 1,112 1,269 915 3,820 624 913 2,274 9 -
32,866 8,798 41,664 5,505 5,929 14,904 6,528 32,866 4,993 8,681 18,674 390 128
31 December 2007
Credit card receivables 4,966 1,170 6,136 629 - 4,337 - 4,966 1,217 810 2,793 146 -
Consumer loans 1,884 331 2,215 647 724 513 - 1,884 1,018 577 289 - -
Auto loans 7,996 2,150 10,146 2,253 856 4,628 259 7,996 1,343 2,793 3,860 - -
Trade receivables 3,286 2,366 5,652 291 816 1,928 251 3,286 116 732 2,183 204 51
Student loans 335 917 1,252 141 - 194 - 335 184 140 11 - -
Floorplan 472 1,426 1,898 - 392 80 - 472 - 392 80 - -
CDOs 105 14 119 - 105 - - 105 105 - - - -
Commercial mortgages 1,178 44 1,222 729 - 178 271 1,178 271 506 401 - -
Residential mortgages -
Prime 4,597 593 5,190 - 172 75 4,350 4,597 26 2,050 2,521 - -
Buy-to-let - - - - - - - - - - - - -
Non-conforming 2,638 716 3,354 1,800 838 - - 2,638 388 1,537 713 - -
Sub-prime 9 348 357 - - 9 - 9 - - 9 - -
Other 3,637 2,324 5,961 474 1,064 902 1,197 3,637 1,098 422 2,117 - -
31,103 12,399 43,502 6,964 4,967 12,844 6,328 31,103 5,766 9,959 14,977 350 51
Page 12 of 13
Appendix 2
Credit market and related exposures additional information
8.5 Investment funds set up and managed by the Group
The Group's investment funds are managed by RBS Asset Management (RBSAM), which is an integrated asset management business that manages
investments on behalf of third-party institutional and high net worth investors as well as for the Group. RBSAM is active in most traditional asset classes using
fund of funds structures and multi-manager strategies. RBSAM also specialises in alternative investments such as private equity and credit products as well
as funds of hedge funds. Assets under managements were £33.4 billion at 30 June 2008 (31 December 2007 - £30.9 billion) and includes long only funds of
£23.2 billion (31 December 2007 - £22.1 billion), alternative investment funds of £6.5 billion (31 December 2007 - £6.2 billion) and private equity funds of £2.4
billion (31 December 2007 - £2.4 billion).
8.6 SIVs
The Group does not sponsor any structured investment vehicles.
Page 13 of 13