Borrowing from the credit card, mortgage and CDO sectors, Cendant Corp. has unveiled the latest structural innovation to the ABS market. Named Terrapin Funding, structural advisor and underwriter Lehman Brothers has developed a transaction that allows Cendant to essentially delink senior classes of fleet lease securitizations and pre-fund subordination for future offerings. The trust is named after the Hunt Valley, Maryland headquarters of auto fleet leasing unit PHH Vehicle Management.

Terrapin is a resecuritization of the preferred membership interest cash flows of Chesapeake Funding, which were earmarked for the subordinated classes, and which have already paid down. Specifically, Terrapin will provide enhancement for the 2001-1, 2002-1 series and pre-fund the subordination for the yet-to-be-issued 2003-1 series. The 2002-2 series, according to the Moody's Investors Service presale report, was not structured with preferred membership interests.

As the first-loss piece, considered quasi-equity, the term of the preferred membership interests is much longer - approximately 30 years - versus the relatively short-dated subordinated classes in the Chesapeake structure, allowing for the resecuritization of cash flows. The Chesapeake preferred membership interests had previously been sold into a conduit. Terrapin, conversely, is structured to average lives of three and five years (see structure below).

Described as "ABS cash flow analysis superimposed over CDO technology," Terrapin is essentially a repackaging of subordinated cash flows, sources said. Therefore, it is "theoretically possible for this structure to be applied to the subordinated classes of any asset class," one source said. Had they been rated, the source added, the preferred membership interests would have received an investment-grade rating.

Sources close to the structuring of Terrapin compared the de-linkage to the credit card trusts that have emerged from Citibank, Capital One Financial and MBNA America Bank. There are also nuances of Cendant's mortgage warehousing facility Bishops Gate Residential Mortgage Trust, such as a funds availability feature allowing Cendant to extend the term of the Terrapin B and C classes, albeit at a greater spread. The corporate exposure inherent to the portfolio prompted the addition of diversity and average rating factors.

Centant's fleet-lease portfolio consists of more than 1,800 obligors, 80% of which were rated investment-grade by both Moody's and Standard & Poor's. The diversity score for the lease portfolio is estimated by Moody's to be "around 50," a relatively low score, due to the assumption that lease obligors in the same industry be correlated and counted as one. While Moody's rated 75% of the lessees, the rating agency also shadowed the unrated entities two notches below where it felt the entity would be rated.

While there are no restrictions on industry concentrations or average ratings, an increase in concentrations, or a deterioration in lease obligor ratings, would raise concerns among the rating agencies. Cendant's lease originations over a 15-year period, however, show consistent performance and even increased obligor diversity over that period, sources said.

In another interesting twist, until Cendant amended its Chesapeake trust recently, the 2001-1 and 2002-1 series had been on watch for a downgrade from Standard and Poor's. While an S&P spokesman said, "We could have put a rating on this deal regardless," he did concede, "there is no way to tell what those ratings would have been without the granting of the perfected interest Cendant made to the leasing assets." The move fully de-linked the trust assets from the seller/servicer (see ASR 06/30/03 p 8).

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