The bankruptcy of Oakwood Homes will test for the first time the value of a form of credit enhancement commonly used in manufactured housing sub tranches - the corporate guaranteed B2 tranche - which rose to prominence back when the majority of MH lenders garnished investment-grade ratings. In its most recent 8-K, filed last week with the Securities & Exchange Commission, Oakwood proposed that as part of its reorganization, holders of $275 million of sub paper are being offered a 36% equity stake in whatever entity emerges from bankruptcy.
While investors expect Oakwood B2 ABS bonds to lose some principal, the guaranty offers essentially puts B2 investors in the same, or even better position as senior debt holders in the bankruptcy proceedings. Unlike the senior debt holders, ABS investors retain their interest in the B2 paper, as this is an exchange for the guaranty rather than the bonds themselves.
The proposal would require the approval of half of the senior debt and asset-backed B2 holders combined. By going out of its way to appease sub ABS, it is assumed that the company, should it emerge from Chapter 11, plans to securitize again in the future.
The corporate guaranty has been come into play in the past, in the case of the bankrupt United Companies Financial Corp., it has never had such a prominent role. When United went into bankruptcy in December of 2000, it continued to make payments on its guaranteed ABS until EMC Mortgage, a unit of Bear Stearns, purchased the portfolio.
Oakwood began offering the corporate guaranty with its 1997-A offering, and used the enhancement through 1999. In 2000 Oakwood crossed into the realm of speculative grade, nullifying the value of a corporate guaranty. There are 20 classes of corporate guaranteed B2 paper outstanding, the value of which has since been re-estimated at $171.9 million, Oakwood reported in its most recent 8-K.
Why would senior debt holders, who are already at the top of the bankruptcy waterfall, want to let ABS investors take one-third of their pie? Most likely because unsecured debt investors understand the asset-backed market is the best source of liquidity for Oakwood.
Oakwood too understands the symbiotic relationship, saying in a bankruptcy court motion: "The debtors believe that continuing to participate in the securitization transactions described herein and other similar transactions in the ordinary course of business is critical to the Debtors' ability to reorganize successfully under Chapter 11."
Without securitization markets, Oakwood would have to resort to liquidating its loans at wholesale, according to Fitch Ratings, which last week placed all outstanding Oakwood ABS on negative watch. Fitch adds that assuming such a scenario, losses would increase rapidly, likely topping 90%. Fitch downgraded 13 classes from Oakwood Nov 13, due to deteriorating performance of the collateral.
The company also is asking to transfer servicing to a new subsidiary, Oakwood Servicing Holdings Co. As per the servicing and pooling agreements, the servicer transfer would move the servicing fees to a senior position. This is something bondholders may oppose, however, as this would eat into credit enhancement. In the current subordinated position Oakwood claims its compensation is inadequate.
In the past such a move is typically made to make the portfolio more attractive to potential suitor servicers. But in the current environment, with most MH lenders having exited or about to enter into bankruptcy themselves, the options are limited.
The landscape has changed dramatically for the manufactured housing sector since the mid-to-late 1990s. In a report released in 1996, Fitch Ratings noted the rapid growth and new entrants into the lending aspect of the market. Of the six leading MH lenders in that report, only Vanderbilt Mortgage in relatively healthy shape (although unrated, its parent Clayton Homes is rated triple-B).
In last week's negative watch release, Fitch notes "the limited number of manufactured housing servicers as well as the limited interest from mortgage servicers in acquiring the servicing rights to this unique asset," as a hurdle for a portfolio sale.