Something strange is happening with one of the Italian markets most high profile and innovative securitizations, leaving experts in Italian securitization biting their finger nails.

The deal, a transaction called Finance for an Italian Library of Movies (Films) that was arranged by Merrill Lynch & Co. for Italian media concern Cecchi Gori Media Group, was recently placed on negative ratings watch by both Fitch IBCA and Duff & Phelps Credit Rating Co. It is backed by cashflows that arise from a library of Italian films and was worth Lit475 billion ($251 million) at launch in March 1998.

Fitch and Duff & Phelps took the action after Mediafiction S.p.A., the Cecchi Gori subsidiary that manages the film library, failed to make a full rental payment when it was due on December 1. The deal's trustee, Deutsche Bank A.G. in London, said that Mediafiction should have paid Lit12.5 million, but in fact only paid half that amount.

The rating agencies explained that in theory this was a "termination event" but added that the trustee provided a waiver on the understanding that the remainder of the money would be paid very soon.

However, one rating agency official said it was more worrying that Mediafiction and Cecchi Gori had yet to explain what had caused the problem. "That is probably more concerning than anything else," he said. "We haven't received information as to what has happened, why it has happened and what steps have been taken to correct the situation, so that we can make sure it doesn't happen in the future."

Both rating agencies were keen to stress that even if the termination event is enforced it does not mean that a default would automatically follow as the transaction features significant cash reserves. However, if the termination event is enforced and the next step is default, the deal is designed so that the film library is sold to recover investors' principal and the bonds are called.

The picture is further complicated because there has been some question about the level of the on-going surveillance information that Mediafiction has made available to the rating agencies. "Another issue that we have been focusing on is the lack of availability of some of the information ... we are following up on some things that they are legally bound to supply us and what they've actually been supplying. We're trying to get that squared away," the ratings official explained.

At least one of the rating agencies involved had set a deadline of Friday last week (December 10) for Mediafiction to explain the rental shortfall, though the official declined to say what would happen if that deadline is missed.

Market watchers said that the deal could be downgraded or the ratings withdrawn if information isn't forthcoming.

The shenanigans are being closely watched, particularly in Italy, because if investors end up losing money it could have a devastating impact on the nascent Italian securitization market. "Because the trustee can sell the films it seems unlikely that investors will lose any principal, but if the bonds are called they will get their money back well before they expected and they are unlikely to be impressed," one banking source said.

Media analysts added that there have been recent rumors in Italy about the stability of Cecchi Gori, suggesting that the company is having to sell its two television channels in order to stave off financial problems. Cecchi Gori denied it is in trouble and said that the business is currently worth $2.2 billion.

Cecchi Gori also owns Fiorentina, the soccer club based in Florence, which issued a ticket-backed securitization last year worth Lit67.5 billion. That deal was also arranged by Merrill.

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