Amid scores of controversy in other related areas of WestLB, the triple-B rated notes of Home Technology Receivables (No.1) were placed on review for possible downgrade on May 21 by Moody's Investors Service. This followed a spate of bad news in the press surrounding Box Clever, the company born out of the merger of Granada and Thorn in June 2000. Additionally, the press has been hotly following the controversies relating to the principal finance unit at WestLB run by Robin Saunders, who arranged the Box Clever deal last summer.
Around £76m worth of class B notes are affected by the review for downgrade; the Class A notes representing £658m had been placed in a conduit.
The review has nothing to do with the performance of the assets. Moody's notes that none of the performance triggers have been breached and that performance of the assets is in line with Moody's expectations.
Jean Dornhofer, senior vice president at Moody's, explained that: "Although there was a gentle upward trend increasing from December to March in the termination rates, this seems to have gone back down in April, and overall we don't feel there has been a negative trend in the termination rates or in credit default rates. We are obviously monitoring both aspects very closely."
However, the review was been prompted by the deteriorating financial condition of one of the servicing companies, Endeva Service Limited, which provides repair and maintenance services to the leased equipment.
Under Home Technology Receivables (No1.) Plc, the notes are backed by cash flows generated from lease agreements for TVs, VCRs and other white and brown goods. As customers have the right to terminate their contract after 18 months, maintenance and repair services are critical to the performance of the assets. Therefore, Moody's believes that the rating of the class B notes is conditional on a stable servicing platform being in place.
A full assessment of the extent of the servicing situation is currently underway with the company and banks involved, and Moody's said that it hoped to conclude the review in weeks rather than months.
At the time of the transaction, Moody's placed a lot of weight on the servicing aspect of the deal and viewed this as one of the potential risks. In fact, at the time of the transaction, Moody's had highlighted Box Clever's existence as the only U.K. rental company for these types of goods, which posed problems as it did not benefit from a stand-by servicer at the time of closing.
When the transaction was executed last summer, Moody's was provided with an independent survey, which detailed possible servicing solutions, and it concluded that the servicing risk, combined with the structural features of the transaction, was consistent with the rating on the class B notes.
However, as Dornhofer further explained, "Endeva is the subsidiary that carries out the repair services, and it seems to have encountered some financial difficulties. The repair service is critical to the performance of the assets, and we are now looking at assessing whether Endeva is still able to service the receivables in the transaction, and also the current strength of the Plan B which considers whether other entities could be put in place and provide this service replacing Endeva."