ContiFinancial hit the top of the news last week, filing for bankruptcy just days after announcing the sale of its servicing operations to Fairbanks Capital Corp. - a move which kept the company's bonds from the cliff's edge, said market sources.

Though bankruptcy alone (minus the servicing transfer) would not warrant an immediate ratings downgrade, the filing was substantially softened by the Fairbanks factor.

"I think Conti was waiting for the Fairbanks resolution to announce the bankruptcy, it was anticipated," said Diane Westerback, senior analyst/vice president at Moody's Investors Service.

As for the servicing transfer, "In general we view it as a positive," she said. "We view Fairbanks as a highly capable servicer, and gave it our highest ranking. We think their servicing abilities are quite strong."

Still pending, however, the bankruptcy filing exposes the servicing transfer to a number of issues, explained Susan Barnes, a director in the residential mortgage group at Standards & Poor's Ratings Co.

"It could potentially delay the transfer," she said. "It's just going to hold it up potentially, that's my first reaction."

Specifically, the Fairbanks transaction is subject to procedures that have to be approved by the bankruptcy court, which may include the ability of the creditors to bring in another buyer for the servicing platform, though most observers believe that's unlikely.

Accordingly, within minutes of ContiFinancial's announcement, MBIA, which wrapped a number of the transactions, came out assuring investors that it would not be negatively impacted by the Chapter 11 filing.

In a prepared statement, Vice Chairman Richard L. Weill said that MBIA had been aware of ContiFinancial's financial stress for quite a while, and had been working with the company to insure a smooth servicing transfer.

Indeed, ContiFinancial has been on the brink for nearly a year - another casualty of the 1998 liquidity crisis, which plucked a number of specialty finance companies from the industry.

"There was an anticipation that they were going to file back in March, but then the banks ran into some forbearance on a certain number of their loans, which enabled them to stay current on everything else and avoid Chapter 11," said a source close to the company.

Other operations of ContiFinancial, namely the origination businesses, must still be accounted for, the source added. Over the last year, GMAC's Residential Funding Corp. had been in talks with ContiFinancial. Players speculated that RFC would possibly acquire the company.

"But that fell apart," the source said. "Since that time, there have been several parties who were in negotiating with them at the end of last year, and into the first quarter of this year. We're going to see a resolution, at least in terms of agreements being signed, very shortly.

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