The Master Liquidity Enhancement Conduit, the super-fund planned by four U.S. banks to ease liquidity concerns in the market, could give more than $1.3 billion in management fees to the four banks participating, the Financial News reports.
Bank of America, Citigroup, JP Morgan and Wachovia are backing M-LEC, which is supported by the U.S. Treasury and expected to raise assets of $75 to $100 billion. Three people who have seen a prospectus dated October 8 a week before the fund became public told the Financial News the banks will earn 1% on structured investment vehicles of less than $5 billion, and 1.5% for SIVs more than$15bn.
The banks will also earn fees for the provision of backstop liquidity facilities.
Christian Stracke, an analyst at CreditSights, told the Financial News, “Even at 1% it’s still very high. These are vehicles that have little wriggle room in what they can afford to give up, especially SIVs that have taken a beating in their asset values.”
The prospectus also details what SIVs will receive for selling their assets to M-LEC. Qualifying SIV holders will be eligible for up to 94% of the value of the assets they sell in cash, or 89% cash and 5% in senior capital notes, in the form of medium-term notes, which will participate in part of the upside when the assets mature.
SIVs can also buy junior capital notes based on a formula set by M-LEC, where SIVs would get 3% plus half the discount at which they sell their assets. For example, if the SIV sells its assets at 98, which is a discount of 2%, it could take 94% of that in cash and 4% in junior capital notes.
The banks, which met again last Friday evening, may have refined the initial terms in the past three weeks.