No one, it seems, can doubt these are tough times for the securitization market. With just over one-and-a-half months left in the year, 2002 will likely set multiple precedents in terms of servicer transfers, early amortization and issuer bankruptcies.
On the forefront, bankrupt independent finance concern Union Acceptance Corp. looks like it is on its way out of the asset-backed market for good, sources said, pending the transfer of its servicing rights, which surety MBIA is actively attempting to implement.
The situation, it should be noted, poses no threat to investors, as MBIA fully wraps the transactions in question. As such, there has been zero spread movement in UAC deals, sources said, though that's based on zero trades.
During last Thursday's conference call, UAC chief executive officer Lee Ervin told listeners that it suspended its receivables acquisitions and loan originations due to an inability to obtain debtor-in-possession financing. Ervin alluded to a legal dispute in which MBIA is seeking to force a servicing transfer.
In its initial press release on Nov. 1, UAC stated it was temporarily suspending receivables acquisition activity until it obtained DIP financing, which it anticipated would be in place "within a few days." With no agreement firmed up after a week and new revelations of excess yield and delinquency triggers being tripped, the future looks bleak for Union Acceptance.
UAC/MBIA court battle, DIP financing at issue
Despite Ervin's stated determination to "maintain a high quality of servicing," the largest hurdle for the company will be preventing MBIA from forcing a change in servicer. Within the bankruptcy filing, Union Acceptance disclosed it filed an adversary preceding with MBIA, in an attempt to block MBIA from forcefully transferring the servicing rights - something that, should it occur, would leave UAC with no business to reap any sort of profit from.
The U.S. Southern District Bankruptcy Court of Indiana restrained MBIA from forcing the servicing transfer until Dec. 2, 2002, at which time - if UAC fails to obtain DIP financing - it seems unlikely the company would be able to prevent the transfer. "If MBIA holds the risk to all those deals, they can probably force a transfer," one market source said. "MBIA is probably already exploring these opportunities with the auto lenders it has relationships with. If they can prove a good fit to the bankruptcy court, Union Acceptance wouldn't have a choice."
"Once the servicing is transferred, UAC is toast," an investor source added.
Finding a new servicer should not be a challenge, sources indicated, as MBIA insures many auto lenders' ABS, including Onyx Acceptance Corp., CarMax, Capital One Financial and Household Finance. Also, MBIA insured the most recent auto ABS from AmeriCredit Corp.
At first glance, the portfolio looks better than average, with an average monthly FICO score of 703 thus far during 2002, according to the company. Additionally, approximately 66% of accounts originated have a credit score of 675 or better, and less than one percent of the accounts have a FICO score below 625.
On the call, Ervin blamed the economic environment and its impact on UAC's retained residuals for the bankruptcy. He said a reassessment of the value of its residuals, discounting by 12% from 9%, led to a $29.7 million charge in the third-quarter. UAC reported a third-quarter operating loss of $35.5 million.
A cash crunch was already underway at UAC, which used up $445 million of its $550 million credit facility, and had just $14 million of cash on hand. UAC most recently sold auto loan ABS in March, with a $300 million 2002-A offering, led by Wachovia Securities and wrapped by MBIA.
This was the first year since UAC entered the ABS market in 1995 that it hasn't securitized multiple times. UAC had been a quarterly issuer until 2000, when it brought three transactions totaling $1.32 billion, and tapering issuance last year to two for $903 million.