Some of the biggest players in ABS and the fixed-income sector - including the Bond Market Association, MBNA, GE Capital Corp., Residential Funding Corp., Consumer Mortgage Coalition and a slew of steel companies - have jointly filed an amicus curiae (friend-of-the-court) brief in the pending LTV Steel bankruptcy court case, hoping to stave off a court decision that can potentially call into question one of the most basic premises underpinning the concept of securitization.
Investors and others are challenging LTV in an Ohio bankruptcy court over the company's decision to divert receivables away from an SPV in order to pay its workers after it filed for chapter 11 bankruptcy in late December 2000. The cash was directed back into the company, therefore calling into question whether investors' securities were actually bankruptcy remote. Investors claim that LTV sold the receivables to the SPV in a true sale.
If the judge presiding over the case sides in favor of LTV, observers predict that investors will become more wary of ABS, thereby making it much more difficult for other companies to raise finance cheaply.A hearing for the case is scheduled for Wednesday, March 7.
"Like all of the entitities filing amicus briefs, we have presented our concerns related to the desire among all participants to preserve the legal certainty and predictability associated with the fundamental premise of securitization that assets can be isolated from the bankruptcy estate and from credit issues that may affect the transferor of those assets," said George Miller, deputy general counsel for the Bond Market Association. "If there is any decision or action by the court that will call that premise into question, it could have an adverse impact on the continued viability of securitization, a significant impact on investors and on the underlying...consumer borrowers who benefit...from a broad and efficient securitization market."
In the past, Miller said, "true sales" issues have been presented in the context of securitization transactions, whose structural features have been upheld and respected by courts. However, the current case will surely require an analysis of whether or not LTV made a true sale of assets, and that is a determination that needs to be made by the application of existing case law. The problem is, there is no case law that is directly on point, that provides clearcut guidance.
"In the past, participants relied on analysis that attorneys applied to these deals, providing adequate comfort for the treatment of securitization transactions in the event of a bankruptcy," Miller said. "This time, they will have to make a decision on the basis of applying the law established in other contexts to securitization. This analysis will have to be applied to a broad range of securitization transactions involving lots of different asset types...We have potential and prospective concern."
The breadth and range of companies, investors and trade groups listed on the amicus brief reflects the potential attack on securitization markets and structures which this case represents, Miller added. "People are watching and waiting," he said.