Fitch IBCA has downgraded one of Italy's most innovative securitization deals by three notches. The Lit475 billion ($244 million) transaction -called Finance for an Italian Library of Movies (Films) - was cut from A-minus to BBB-minus.
It first became clear that the Merrill Lynch-arranged deal was in trouble in November last year when Mediafiction, the company that manages the library of films that provides the cashflow to back the deal, only made a partial payment of receivables to the deal's trustee (ASRI 12/13/1999 p.1).
The partial payment was initially considered a termination event by the ratings agency (which put the deal on ratings watch), but the enforcement was waived pending full payment, which was eventually made.
According to a statement from Fitch issued yesterday (26 January), the downgrade was confirmed because another payment was missed. Whether this too was a termination event or whether Mediafiction still has time to come up with the money is in dispute.
"There wasn't the transfers of the money that there should have been," said Kimberly Slawek, Fitch's London-based managing director. "Whether the cash remained with Mediafiction and simply wasn't transferred to the transaction account or didn't exist we don't have the information. "
According to the agency's statement, at a meeting on 17 December last year a Mediafiction official explained that payments had been missed after key people at Mediafiction's parent company, Italian media concern Cecchi Gori (the deal's issuers) had been terminated, "which had prevented adequate financial planning to ensure all creditors were paid in a timely fashion."
"We're awaiting confirmation from the new chairman and CEO [of Mediafiction] as to the financial condition of Cecchi Gori and their ability to meet financial commitments going forward," Slawek said.
Fitch director Matthew Webster added: "Because they didn't have adequate financial planning, I would assume that... rather than putting together an active plan to make sure that they were meeting all the deadlines on the specified date, they were pushing up against the deadlines as much as possible and only paying what was absolutely necessary."
However, missed payments are not the only reason cited by Fitch as reasons for the downgrade. The agency also said that an independent valuation of the film library - conducted by Houlihan Lokey Howard & Zukin, an investment bank that specializes in media and entertainment - has determined that in the event of a "fire sale" it is now worth only Lit590 billion, rather than the Lit741 billion it was valued at when the deal was launched.
Fitch said that this means that ratios governing the overcollateralization of the deal (which should be above 1.56%) are likely to be breached when a final calculation is produced by PriceWaterhouseCoopers. If that happens, the issuer has the option of providing more funds (or a letter of credit) to take the overcollateralization back above 1.56%; if that doesn't happen it is another termination event.
If, for whatever reason, a termination event is enforced the film library will be transferred to a company responsible for holding the fire sale, the proceeds of which will be used to repay the bondholders, Slawek explained.
As if this wasn't enough, the agency also cited a "failure to receive timely and accurate performance information" as another reason for the downgrade.
The deal was also rated by Duff & Phelps Credit Rating Co. (DCR), which has placed it on ratings watch, but not yet downgraded it. According to a statement issued on January 12: "Following a noteholder's meeting, and a brief written statement from the Cecchi Gori Group, no further details have been made available to DCR as to the reasons for the payment default or the likely remedies. DCR has made persistent attempts to seek information from all parties upon which to base appropriate ratings actions."
European securitization pros will be watching the events closely and pondering the likely effects on the Italian and wider European ABS market.
One Italian securitization expert suggested that the fact that one deal was underperforming should not have a significant impact on the general Italian market. He added though that it would be more serious if the problems resulted from not foreseeing all reasonable eventualities.
Others suggested that because of the relatively esoteric nature of the deal it would not affect the general Italian ABS market.
The seven-year deal launched in March 1998, when it priced at 100 basis points over three-month Libor.
It proved impossible to contact DCR or Merrill officials for comment.