The battle between bondholders and CFN Investment Holdings is finally petering out after a bankruptcy-court ruling that awarded the Conseco Finance unit to the buyout firm. As part of the agreement, CFN made two key concessions to bondholders - a 12-month step-down in the servicing fee and the creation of an oversight committee consisting of bondholders.
The impacts of these developments will begin playing out within the next six-months and may not be fully understood for up to two years, market sources theorized.
As previously reported, CFN seemingly has won the battle for the servicing fees, getting the increased 125 basis points it desired for the first year before a decrease to 115 basis points. The oversight committee, something bondholder committees had fought for since reorganization proposals first hit the table earlier this year, is not seen as having much executive power over CFN.
Merrill Lynch researchers estimate that, once the step-down takes effect, roughly $70 million in value will be indirectly diverted to sub-holders. The step-down is likely to take effect in May 2004. Merrill does, however, add that "a few things remain unclear," with the still-pending agreement.
Investors agree. "The lowering of the servicing fee does not necessarily create value, it may even act as a disincentive for the servicer and lead to increased [loss] severities in the portfolio," an investor said. "And how much power can an oversight committee have over CFN?" he asked. "The only recourse an oversight committee could have, would be a lawsuit." Additionally, potential conflicts of interest exist for a bondholder who also sits on an oversight committee.
Overall, Merrill researcher Glenn Costello thinks these developments, which are expected to be implemented in May, are positive for the majority of Conseco MH ABS holders. "CFN has a majority approval of bondholders and the approval of Fannie Mae so I think the trustee (U.S. Bank) would likely go ahead with the change - they have to do what's best for the trust as a whole," noted Costello.
As for the oversight committee, while he conceded that its role and power of enforcement are unclear at this point, "the oversight committee is a good thing for bondholders," he commented.
After news of these concessions broke, the subordinated tranches of Conseco MH paper, the subject of much speculative trading over the past two years, did not bounce back. As of late last week, B-1 and B-2 classes were each quoted at "cents on the dollar." Double-A rated M-1 tranches meanwhile, one step up on the payment waterfall from the B-1 bonds, were quoted in the $12 area. By contrast, the triple-A tranches should see, "improved spreads and liquidity, particularly seasoned classes," Merrill theorizes.
On March 11, before news broke that CFN was awarded the portfolio and the increased servicing fee, Standard & Poor's downgraded 14 corporate guaranty B-2 bonds to D' from CCC-', reporting two consecutive months of interest shortfalls. "Without the guarantee payments deposited by Conseco, S&P believes that B-2 interest shortfalls will continue to be prevalent in the future for all of the guaranteed certificates," S&P said in its statement.
Fitch Ratings downgraded the B-2 bonds of 45 outstanding transactions to C' from CC' on Dec. 5, 2002, where they remain on watch negative. Moody's Investors Service affirmed its Ca' rating last Dec. 24. Holders of the B-2 bonds confirmed the shortfalls, which they expect to continue. The B-1 bonds, reportedly could expect "months of cash flows" ahead.
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