Veteran home-equity lender Delta Financial is close to sealing the deal on its residual-interest-for-high-yield debt trade, a transaction the company began working on earlier this year in efforts to restructure its pricey corporate debt (see ASR 5/14/01).

The option for the exchange is open to the debt holders until Aug. 20.

The company included these details in its third amendment with the Securities & Exchange Commission, to swap equity interests of its newly formed entity, Delta Funding Residual Exchange Co., for two classes of 9.5% senior debt due in 2004.

According to the filing, "If the exchange offer is not consummated, [the company] will not be able to continue as a going concern."

"Once this is consummated, and we expect it will be, we believe that the rating agencies rating the company's debt will withdraw their ratings, considering there will be little or no debt outstanding," a spokesman for the company said.

Delta's current debt is rated Caa2'/CC' (M/F).

Delta values the mortgage-related securities, which will be owned by Delta Funding Residual Exchange Co., at approximately $150 million. The mortgage-related securities are primarily residual interests associated with the company's past securitizations.

Essentially, for each $1,000 of principle exchanged, a debt holder will receive one share of preferred stock of the Exchange Co., one voting membership interest in the Exchange Co., and one share common stock of Delta Funding Residual Exchange Management, which will oversee the distribution of cash from the liquidating facility.

At the top of the waterfall, Delta will receive distributions that will be used to repay its obligations to the New York State Banking Department, associated with a legal settlement in 1999, charging that Delta had engaged in abusive lending.

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