Egg's troubled outstanding securitization bonds under its Pillar Funding series (ASR,10/30/06) could see some relief, following statements from the seller that it plans to implements new accounting measures by early next year.
In a press release issued last week, Egg announced that it updated Moody's Investors Service on mitigating actions, which may be undertaken to alleviate the impact of recently revealed trust accounting policies on outstanding Pillar Funding Plc bonds. Under Egg's current procedures, delinquent accounts are terminated prior to being charged-off and these customers are placed on a reduced minimum payment plan amortizing over 10 years. The minimum monthly payment required for these borrowers is reduced from the typical 2.00% down to 0.83% of the outstanding principal. No interest or fees are charged on the principal balance. These 0.83% account balances can be reported as current, delinquent or charged-off, depending on the amount of payment being received.
As a result of this practice, some of these accounts that have paid less than 2.00% but more than 0.83% for 360 days have not been charged-off. Under Egg's previous charge-off policy, these accounts would have been charged-off and as a result, Egg's charge-offs are currently under reported in comparison to the industry standard.
Rating agency reaction
Moody's -which has placed a negative watch on the junior triple-B rated bonds - confirmed that it has received in writing Egg's intention to implement, at the beginning of 2007, features that aim to reduce the impact of these policy changes on the existing notes and that will provide additional enhancement to support the ratings of Class C notes. The ratings of both the Class A and B notes remain unaffected by Moody's review of the Class C notes.
Any additional credit support will be sized to precisely mitigate the rating risk, said Deutsche Bank analysts. Under such a scenario, analysts said it is likely that Moody's will affirm the junior Pillar bond ratings in the New Year - Fitch Ratings may also be inclined to upgrade the Class C notes back to BBB'.
"With additional support we are likely to review the bonds positively but we won't issue any comment until we have further details and the additional support is actually in place," said Heather Dyke, a Fitch analyst.
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