To date, there has been just one or two visible instances of triple-A asset-backeds defaulting the most notable involving a multi-line surety provider's failure to honor a financial guaranty (i.e. Hollywood Funding No. 5/Lexington Insurance Co., see ASR 3/19/01).

However, the Heilig-Meyers 1998-2 A-class notes, also formerly triple-A rated, might have hit a technical default, depending on your definition, market sources said. During the February 2002 distribution period, the A-class notes fell short on about $520,000 in principal, according to Standard & Poor's.

Standard & Poor's subsequently downgraded the A-class to D' from CCC'. Moody's Investors Service and Fitch Ratings have the same class at Caa2' and CC', respectively.

The issue at hand, according to market sources, is whether or not a principal shortfall during a payment period necessarily indicates an ultimate shortfall at legal final maturity. In its release, S&P states that it "believes that the likelihood of class A certificate holders receiving full repayment of their initial investment amount (including the recovery of the investor charge-off amount experienced to date) by the final maturity date of the series is remote."

The question became significant last week when Karen Weaver, head of ABS research at Deutsche Bank, stated during a press conference hosted by the Bond Market Association that Heilig-Meyers had in fact become the first triple-A rated ABS to default (see conference story p. 2)

Although the principal in the A class notes has been written down, it is still possible that the notes could pay out full principal, which would arguably nullify the event of default. According to sources, about 38% of the initial A-class in the series 1998-2 is still outstanding (the same amount is still outstanding in the A-class of the 1998-1 series). All subordinate classes have been written down entirely.

"What this does is raise the question on what is a default in ABS," said Mark Adelson, head of ABS research at Nomura Securities. "Is it a default? Is writing down the certificate an acknowledgement that it's not going to make it all the way?"

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