Cendant Corp., the largest travel and real estate services company in the U.S., announced last week that it had spun off subsidiary PHH Corp., an entity that housed the mortgage and fleet leasing operations of the parent company.

Following the distribution of PHH shares to its stockholders (one PHH share for every 20 Cendant shares held), Standard & Poor's cut PPH's long-term counterparty rating one notch to triple-B and Moody's Investors Service lowered PHH's senior unsecured debt ratings to Baa3' from Baa1' and its commercial paper rating to P-3' from P-2'.

Despite the new servicer having lower ratings than its predecessor, the downgrades are immaterial to and are not likely to have an impact on Chesapeake Funding, PHH Corp.'s auto rental fleet ABS issuance vehicle, said Fouad Onbargi, director at Barclays Capital. "The bonds benefit from lease cashflow and fleet management receivables, which will not be impacted by the spin-off," Onbargi said. "PHH has been in the fleet leasing business for decades and there's going to be no change in management or operations so we think the fleet business will be run very efficiently."

Onbargi noted that the bonds are structured with enhancement levels that are many times greater than historical losses. "Losses are in the basis points as a percentage of debt issued, yet overcollateralization to triple-A is in the low-to-mid teens. The Chesapeake bonds include built in protections against any erosion to fleet management receivables balances to ensure liquidity for debt service," Onbargi added.

Looking forward, Onbargi added that he believes the new parent will continue securitizing, since it has become a key part of PHH's funding platform and there is market appetite for both the asset type and for Chesapeake's name. "I think the market is going to be very receptive to future issuance and it will continue to be an important part of [PHH's] funding mix," he said.

On a separate note, Cendant last week also set the terms for the initial public offering of its fuel card business unit, Wright Express, at 40 million common shares with the estimated price range of $19 to $21 a share, stated public information. Wright Express's spin-off is to be completed in the near future, said a source familiar with the transaction. In addition, JPMorgan Securities is leading the deal, which may be worth more than $1.2 billion.

Alternatively, Cendant acquired Gullivers Travel Associates and Octopus Travel Group Ltd. in December 2004 for $1.1 billion and Orbitz, Inc. in September 2004 for $1.25 billion, said company information. Proceeds from the Wright Express and PHH spin-offs are speculated to go toward funding the acquisitions, stated public information.

"Cendant is positioning itself as a true travel and leisure company," Onbargi said. "[Cendant] has looked at some of its businesses and determined that mortgage and fleet leasing companies don't really fit the core Cendant strategy," Onbargi added.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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