A close runner-up to Providian's financings, Deutsche Bank Securities managed to structure a debtor-in-possession securitization for bankrupt rental car concern ANC Rental Corp., parent company of Alamo Rent a Car and National Car Rental.

Like Providian, ANC's troubles blossomed in fall 2001 - in ANC's case, exasperated by the slowdown in travel associated with terrorist attacks in September. ANC filed for bankruptcy in November.

As the securitization occurred while the servicer was in bankruptcy, the $600 million ARG Funding Corp. II was novel on several levels. For one, it was structured with senior/subordinate credit enhancement, which is fairly uncommon in the rental car sector. Also, a primary investor protection in a typical rental car securitization is the servicer bankruptcy "trigger event," which generally leads to a fleet liquidation following a predetermined stay period. In the stay period, the issuer decides whether to liquidate the fleet or continue using the vehicles and making payments. Regardless, the transaction enters an amortization period, meaning that, as the vehicles are liquidated through the normal course of business, proceeds are used to pay down the bonds, not to purchase new vehicles.

Ironically, where a bankruptcy is an early amortization event in most rental car fleet securitizations, an emergence from bankruptcy is a potential amortization event in ARG II, as investors would have the option to call the deal.

For it to work, ANC needed to receive approval from bankruptcy court and a ruling that the securitized fleet would be considered outside the estate. If ANC emerges, the force of the court order goes away. At that point, the transaction would behave like a normal rental car securitization, with the automatic stay period and the amortization event reinstated.

Also, for ARG to be successful, structurers needed to map out the liquidation of the portfolio in advance of the securitization. About 85% of the automobiles in the portfolio can be "put" back to the car manufacturers, which means that the manufacturers are contractually obligated to purchase their vehicles back out the portfolio (at which point they become used cars).

In the event of default, bondholders have the right to an expedited court hearing. While that wouldn't mean that the liquidation would start immediately, there would be expedited rights in court, similar to rights of a DIP financer.

There are three possible courses for this deal. As noted above, if ANC emerges, the bondholders are given the option to keep the deal going, as opposed to having it enter rapid amortization. If it is kept going, the automatic stay period would be reinstated in the deal structure and the deal would continue until maturity (barring no other protections are triggered). The second outcome would be an immediate liquidation and payout of the bonds if ANC were to move from Chapter 11 into Chapter 7 bankruptcy. The third possibility is that transaction pays in full before ANC emerges (all classes on the deals have weighted average lives less than 2.5 years).

Though completing the transaction was a feat in-and-of-itself, ARG priced at fairly wide spread levels, with the 2.06-year triple-A A class pricing at 125 basis points over one-month Libor. Interesting, the B class carried a split rating: triple-A from Moody's Investors Service versus double-A from Standard & Poor's. That class priced at Libor plus 190 basis points.

In comparison, the five-year triple-A class notes of Avis Holdings Group's July 2002 deal priced at just 29 basis points over one-month Libor, although that deal featured a wrap from Ambac Assurance Corp.

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