The ABS market experienced its first early amortization of the year last week, when Mellon Bank Premium Finance Loan Master Trust, Series 2002-1 breached its 5% transferor interest 10-day average trigger, according to records filed with the Securities and Exchange Commission. In the filing, issuer Mellon Financial Markets, reported that the event occurred on March 7, and that funds were in the process of being deposited with the trustee, Wells Fargo Bank, and monthly principal distributions would begin with the April 15 payment.

While the reason for the early amortization remains unclear, sources with knowledge of the transaction speculated that the receivables balance decline was related to reduced volume contributed by Marsh & McLennan Co. Steve Cobain, listed as the Mellon contact in the SEC filing, refused to comment and Deutsche Bank Securities, which structured and led the transaction jointly with Mellon in December 2002, did not return calls seeking comment by press time.

"If borrowers cancelled policies and took them elsewhere, it could be a cause [of the transferor balance decline]," said one trader who noticed the trigger announcement. "The 2004 deal is unaffected and it looks like a non-event from a credit standpoint anyhow [for the 2002-1 transaction]," the trader added.

While from a credit perspective there is little for investors to worry about and the three-year average life deal was scheduled to mature later this year, although the legal final maturity is Dec. 17, 2007. Additionally, the series 2004-1 transaction, which priced via Citigroup Global Markets, was structured with a lower, 3%, transferor interest, according to a Moody's Investors Service presale report on the June 2004 deal.

For those unlucky enough to have purchased the outstanding bonds at a premium - recent trades were reported in the 100.1875 to 100.25 range by market sources - they will lose future interest and receive par. Mellon Premium Finance Series 2002-1 priced at 30 basis points over one-month Libor at new issue, while the series 2004-1 deal, also structured with a three-year average life, priced at 16 basis points over Libor.

As for what led to the decline in transferor interest, market participants believed that it related to the recent negative headlines surrounding March & McLennan, which became involved in a New York State Attorney General investigation over bid rigging, charging contingent commissions and various antitrust violations.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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