In the wake of LTV Steel headlines, where bankruptcy remoteness is being challenged (see ASR 2/26/01, p.3), news and substantial ratings actions surfaced last week concerning the Heilig-Meyers master trusts, which could be as detrimental to investor confidence as LTV.
Both Moody's Investors Service and Fitch dropped ratings on numerous classes from the series 1998-1 and series 1998-2 of Heilig-Meyers' Master Trust. Most notably, Moody's dropped the class A's from both series to B3' from Aaa,' while Fitch dropped the same classes to BB' from AAA.
Moody's cited delinquencies jumping to between 60% and 70% from 7.5% in July 2000. Both deals were sold as 144A placements, and the 1998-1 series included a true private C-class.
One of the more controversial issues is that, between Heilig-Meyers' July servicer report and the data released in late February, there was a relative freeze of information.
All three rating agencies placed the Heilig-Meyers trusts on review for downgrade in August, after the company filed for bankruptcy, and indicated that it would no longer be servicing the portfolio.
The bankruptcy triggered an early amortization event, at which time the trust was to begin paying principal to the bond holders, although certificate holders feel that the trustee, First Union, hadn't been timely in releasing of the cash.
First Union, on the other hand, said that, because the servicing operation - which Heilig-Meyers essentially abandoned - was in such disarray, there was no amortization model in place to manage the cashflows. First Union has retained PricewaterhouseCoopers to develop the cashflow model for amortization, and said those issues will soon be resolved.
"There are all sorts of allegations being thrown around by the certificate holders, by the trustee, by the servicer, by Heilig-Meyers themselves... there's a big circle of finger-pointing going on," said one source close to the situation.
Regardless, most agree that the deterioration of the trust was the result of one of the most difficult and damaging servicing transfers in the history of the ABS market.
"In a transfer, investors are assuming someone's there to service the portfolio in a reasonably similar manner as the original servicer," said a ratings agency analyst who chose not to be named. "It's an assumption we all make, that certain things will take place in a bankruptcy scenario. And this situation with Heilig-Meyers clearly blew some of those assumptions out of the water. The servicing transfer has really exacerbated the deterioration."
Who's to blame?
The Heilig-Meyers servicing platform was unique, in that it was decentralized, something not often seen in structured finance transactions, which served to complicate the transfer, sources said.
The portfolios are backed by finance contracts on installment, taken out at the time of purchase, for products such as home furnishings and furniture. In this situation, more than two-thirds of the borrower base made payments on location at the various Heilig-Meyers' department stores.
For the transfer, the borrowers had to be "reconditioned," as one source phrased it, to pay by mail. Like credit cards, the contracts were treated as unsecured consumer loans by the rating agencies.
"With respect to the transitioning, Heilig-Meyers basically filed for bankruptcy, and only a few days before it had advised the trustee that it no longer intended to service the portfolio," said Maria Dantas, attorney at Leboeuf, Lamb, Greene & Macrae, and outside counsel to First Union.
Within a day or two, First Union was able to get a state-ordered injunction preventing Heilig-Meyers from firing the personnel necessary to do the servicing, which it had intended to do.
The role of the trustee
When Heilig-Meyers did file, it again attempted to fire the servicing personnel, and terminate the servicing obligations. Again through the courts, First Union was able to keep Heilig-Meyers on as servicer for a period of 60 days. According to First Union, there were as many as one million accounts.
"That's a very short period of time to do a lot of transitioning, and the trustee was successful in doing it," Dantas said. "I think that First Union did an excellent job in assisting the transition of one servicer to another."
In October, OSI Portfolio Services took over the servicing operation. However, sources said, the situation was complicated further because Heilig-Meyers was not keeping accurate records, and did not have current data, such as updated addresses and phone numbers of its borrowers.
"Information that we received from the trustee indicates that there is still some uncertainty with the presentation of data and reconciliation of cash flows," said William Black, a vice president and senior analyst at Moody's.
Because so many of the borrowers made payment on location, it wasn't necessary for Heilig-Meyers to keep accurate records to collect payments, and appear to be servicing diligently, although it was assumed they were keeping accurate records, in case a transfer would need to happen.
"They didn't allocate principal and interest, or finance charges," Dantas said. "So OSI had to develop a program and then break this down so that we could have a P&I split. Those kinds of issues can not be anticipated by a trustee."
However, some sources argue that First Union, as trustee, should have been more closely monitoring Heilig-Meyers' servicing operation, as the monthly servicing reports are put together through the trustee.
"[First Union] should have had a better plan in place," one investor said. "They should have known, in conversations with Heilig-Meyers, that the company was going to file, and that Heilig-Meyers wasn't intending to service the portfolio after the filing."
However, Dantas argued that this is not the responsibility of the trustee.
Others have slipped the blame onto the rating agencies, saying that they should be more closely monitoring the servicing.
A ratings agency source, who chose not to be named, said, "There's a huge concern among the investor base regarding First Union's actions throughout the whole process, both their action and their role as trustee, but those don't come under the ratings universe end of it."