The fate of one of the European securitization markets most innovative deals was being decided as the ASRI went to press.

The transaction - called Finance for an Italian Library of Movies (Films) - was issued by the Italian media group Cecchi Gori in February 1998 (ASRI 2/23/1998 p.3). It was arranged by Merrill Lynch and worth Lit475 billion ($247 million).

Its fate was being decided in a meeting between bondholders and the deal's trustees, Bankers Trustee.

The bondholders were being asked whether they wanted to seize the underlying portfolio of films from Mediafiction, the Cecchi Gori subsidiary that manages the portfolio, and sell them in order to recover their investment after a second missed rental payment from Mediafiction was interpreted by BT as a termination event.

The deal was recently downgraded by Fitch IBCA from A-minus to BBB-minus and put on ratings watch by Duff & Phelps Credit Rating Co. (ASRI 12/13/1999 p.1 and 1/31/2000 p.3), after the missed rental payment (and an earlier partial payment), plus a recalculation of the value of the portfolio.

The recalculation - which was derived from a "mechanical" process, based on the cashflow over the last year - meant that the value of the portfolio fell below that required to keep the deal with an overcollateralization of at least 1.54%.

Mediafiction has 35 days to add films to the portfolio or a letter of credit, in order to take the overcollateralization back above 1.54% and avoid the recalculation being considered a termination event. However, the bondholders could still enforce termination because of the missed or partial payments.

Sources close to the deal suggested that it is possible, perhaps likely, that the noteholders will allow the deal to continue. If so, it will provide what one expert described as a "unique" challenge for the rating agencies who will have to decide whether to effectively "re-rate" the deal based not on the level of overcollateralization, but on cashflow, which - despite the missed payments - at least one of the agencies believes is likely to be strong enough for the deal to continue to perform.

"If bondholders allow it to continue, then the termination event is essentially nullified, and the deal has become something else," said a banker close to the deal. "The cashflow becomes the important factor."

The likelihood that the deal can perform is strengthened because the calculation of the value of the portfolio is based on the receivables that have been generated over the last year, when the company has been keeping films back in order to bid up their value.

"They've been doing things in the last 12 months that from a business perspective are the right things to do, but have affected the valuation negatively because the calculation of [the value of the portfolio] is purely mechanical," one source close to the deal said.

Both agencies will attend some of the meeting as observers and will then decide what action to take based on the decision of the bondholders.

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