Following last week's news that ANC Rental opened the bidding for its operations, one of the more innovative securitizations ever will likely enter early amortization. But with a strong need for financing in order to maintain the rental operations, whatever entity does emerge from bankruptcy will have to access the ABS market, sources said, something that may meet resistance if investors feel burned by how the situation is handled.
Last week, the company received bankruptcy court approval to sell its operations, after having filed shortly after the Sept. 11 terrorist attacks. The initial bidder Cerberus Capital Management, the New York-based private equity fund that is now in the role of the stalking horse, is no stranger to ABS holders, as it was involved in the purchase of Conseco' Finance by CFN Investment Holdings. The ARG Funding 2002-2 deal can be kept alive by the eventual winning bidder, albeit at what was described as a "prohibitive cost." As part of its court-approved agreement, should Cerberus be outbid, it would claim $11 million in severance for its troubles.
Set up more as a DIP financing than a traditional securitization, ARG Funding II 2002-2 was structured with emergence from Chapter 11, or movement into Chapter 7 liquidation, as an early amortization trigger, according to the Moody's Investors Service presale report released last August. If the parent wishes to keep the deal afloat, it would require bondholder approval, subject to rating agency consent.
Rochelle Tarlowe, vice president in Moody's auto group, said that without the protections of the bankruptcy court, which were an integral part of the structure, "Moody's would have to reevaluate the deal." Examples of such changes would include the addition of a liquidity agent, a backup servicer or increasing current credit enhancement levels. "Moody's has indicated that enhancement may need to be increased on [ARG Funding] 2002-2 in one way or another," Tarlowe said.
Any added enhancements would come at the expense of the new parent, and therefore alterations are seen as unlikely. This is bad news for investors of ARG Funding 2002-2, who were well compensated for the one year they will likely end up having held the bonds. The triple-A rated seniors, with 2.06-year average life at pricing, paid a coupon of 125 basis points over one-month Libor. Triple-B rated notes received coupon payments yielding 650 basis points over one-month Libor, as the D tranche priced at a discount.
To continue as a going concern in the current environment, however, some speculated that securitization of its rental fleet is the only option for liquidity. "Whoever wins the bidding, they will have to access the ABS market in a big way," one sources said. Near-term estimates to keep the company running were $2 billion to $3 billion.
It's likely that Cerberus had consulted with surety provider MBIA prior to submitting a bid, therefore assuring that they could get a policy and access securitization markets in the future. "Cerberus is an experienced buyout firm and they'd want to make sure that, if they win the bidding, the rug doesn't get pulled from under them," one trader said. "I don't think Cerberus would even get involved just to find out that they are cut off from funding."
All of ANC's fleet lease ABS were placed in the Rule 144A market and therefore do not change hands frequently, traders noted, making it difficult to track spreads on any outstanding trades. "From a secondary perspective, this is not one of the most actively traded issues," one distressed-ABS trader said.
Holders of the outstanding transactions guaranteed by MBIA, however, are unlikely to feel any impact, as the surety provider has opted to continue to make coupon payments on the deals it insures (see ASR 2/4/02), rather than pay out the remaining principal.