LIQUIDITY SUPPORT
Liquidity support basically comes in the form of facilities to draw from a line of credit. The line of credit provider, quite often, is the administrative agent himself. For single-seller conduits, liquidity support is usually 100%.
The liquidity provider also needs to have a certain rating, and in the event of rating downgrade, the liquidity provider is required to collateralize the liquidity commitment with cash.
Depending on the way the liquidity facility is drawn up, it may go beyond mere liquidity support and provide credit support to the transaction as well. For example, sometimes the liquidity provider enters into an asset purchase agreement, which provides additional protection to the investors. According to Standard & Poor’s (2005c, p. 22):
The liquidity provider also may be willing to provide an asset purchase agreement that provides added protection to investors. The liquidity facility provider’s willingness to agree to such an arrangement will be based on the provider’s independent document review and evaluation of the underlying pool of receivables. Though liquidity banks typically fund for nondefaulted receivables, the banks may be more willing to provide more than just protection against timing mismatches when the originator of the receivables has other banking arrangements with the provider and is an investment-grade client.
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