Yet another scandal hit the ABS market last week, as Academic Management Services Corp., a unit of financial services and insurance conglomerate UICI, announced inaccuracies and collateral shortfalls within its single-seller ABCP conduit, EFG Finding III. The situation was seemingly resolved, however, thanks to MBIA, which had UICI inject federally insured collateral into and rotate non-conforming loans out of the trust. MBIA had surety exposure to $839 million of term and auction-rate securities as well as having wrapped the $663 million EFG III conduit facility.
The problems at AMS were threefold, according to UICI. In its initial release on the topic, UICI listed an insufficient amount of collateral within the trusts, a greater-than-permitted amount of privately insured collateral and reporting deficiencies, which prevented the aforementioned from being noticed. To remedy the situation, UICI agreed to contribute $48.25 million to the EFG III ABCP program as well as transfer in $189 million of federally insured collateral into the trusts. Additionally, $34.4 million of uninsured loans will be rotated out.
After the early-week announcement, all three rating agencies immediately took action, placing the unwrapped vehicles on watch for a possible downgrade. Fitch Ratings and Moody's Investors Service placed both AMS-2 2002 and AMS-3 2003 on watch, while Standard & Poor's placed just AMS-2 2002 on watch for a downgrade. There was no action taken on the deals that MBIA guarantees - EFG III variable funding notes that support its EFG Funding LLC ABCP program, as well as EFG II auction-rate securities and EFG IV, which is a combination of term Libor floaters and auction-rate securities.
Parent company UICI and MBIA moved quickly to address the issue and make sure the situation did not spiral out of control. MBIA, with a history of vigorously protecting its interests, even in the face of issuer opposition, commended UCIC for the alacrity with which it moved to resolve this situation. "We appreciate the prompt and aggressive actions taken by UICI to date to correct quickly the problems found in the MBIA-insured transactions," said MBIA Vice Chairman Dick Weill.
UICI spokesman Dan Einhorn added that the situation had been resolved in regard to AMS and its conduit liquidity providers, Bank of America and Fleet Bank, and the company expected to have the watch removed from its securitizations shortly.
The rating agencies, however, with no announcement of a removal from watch as of press time, were continuing to monitor the situation. "We at Fitch are looking for AMS to provide more information regarding the trusts still on watch," said Fitch Managing Director Mike Dean. "The fact that there were collateral shortfalls in any of the trusts is a really big deal." An S&P spokesman added: "There is more to this than the collateral shortfalls [within EFG Funding III] and our surveillance group is still reviewing the situation."
"Problems have arisen within the trust, but there is no evidence right now that this will be a major blowup," one researcher said. "It looks like the rating agencies have decided to err on the side of caution."
Next major blowup?
Many participants, especially early in the week, speculated that this might develop into the next major blowup to hit the ABS market. The news prompted a flurry of calls from investors to student loan ABS specialists on and off Wall Street. "In recent experience, any time there has been news like this, you see declining recoveries and then you have a blowup," one trader said.
Additionally, with $771 million in auction-rate ABS outstanding, underwritten by BofA and Lehman Brothers, it was not immediately clear whether the news disrupted any potential auctions that may have been scheduled for last week. "We don't know yet, but there could have been a failed auction," one source said. "Auction-rate deals are structured with a maximum rate cap, but rather than price at the max, the underwriter would have to come in and support the bonds for that rate period."
One aspect with which investors, underwriters and rating agencies will have to get comfortable is the management team at AMS, which could be due for a shakeup. UICI Vice Chairman Gregory Mutz took over last week as interim president of AMS, after Lloyd Alcorn had been relieved of his duties and dismissed from the company. As one source pointed out, "In the recent financial reporting and accounting scandals, none have been the work of a single, rogue officer."