Grampian is back on track, says HBOS

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The Independent Online

Grampian, the conduit fund that HBOS had to finance from group money at the height of the credit crunch, is fully funding itself again, the bank said yesterday.

The news is a sign that the market for commercial paper is continuing to ease after it froze amid panic about defaults on US sub-prime mortgages.

Conduits are funds that invest in high-yielding long-term assets such as mortgage-backed securities. They fund themselves by issuing to investors short-term, low-yield debt secured on the fund's assets – asset-backed commercial paper (ABCP). When defaults started to rocket on US sub-prime mortgages, which many conduits had invested in, ABCP investors took fright.

Conduits typically sit off banks' balance sheets. But with prices for buying ABCP going through the roof, HBOS decided two months ago to repay maturing debts for Grampian itself until the market came back.

HBOS said yesterday: "The ABCP market reopened some weeks ago for high-qualitybank-sponsored conduits like Grampian. We have been issuing Grampian ABCP for some time at very good prices. Grampian is now fully funded again through the commercial paper markets."

Grampian is Europe's biggest bank conduit, with outstanding commercial paper valued at about £18bn. HBOS's move sparked fears about banks' conduits, which were unknown to most investors before the credit crunch. Part of the reason for the freezing of the inter-bank lending markets was that banks were hoarding money in case they needed to fund their conduits.

HBOS said at the time that less than 1 per cent of Grampian's assets were in "old vintage" sub-prime, and that it had no exposure to more risky sub-prime loans made in the past two years.

Separately yesterday, the sub-prime lender Elephant Loans warned its profits would be lower than expected in the wake of the summer's credit crunch, sending its shares down 14 per cent.