In an unusual move to douse investors' fears over deteriorating receivables in two First North American National Bank deals, Banc of America Securities recently put up a $ 1 billion irrevocable letter of credit to ensure that investors are made whole. However, surety provider Ambac will be the one to put out the fire should the worst case scenario come to pass.

The defeasance provision was enacted in response to negative one-month excess spread levels reported on the FNANB trusts as losses rose to 21.9%, up from 15.4% a year prior. Losses were due in large part to a failure to add new accounts since the trust was sold at the end of last year, sources said. As a result, the company decided to defease the trust's 2002-A and 2003-A series. Both of these series came with an Ambac wrap, and those insurance policies will remain in place under the terms of the defeasement, leaving the monoline to absorb the losses.

"These deals were likely going to trigger an early payout event," said Barclays Capital director Jeff Salmon. "Investors are now in a much better position."

Upon the deposit of the letter of credit from BofA, the FNANB trust and transferor Fleet Bank, N.A. - the servicer on these deals and recently acquired unit of BofA - were both freed of their obligations under the indenture and the pooling and servicing agreement, respectively. The receivables were removed from the trust and replaced with cold hard cash, rendering the performance of the flagging portfolio null and void to bondholders.

In this instance, Ambac probably approached BofA and worked out a defeasement to make sure that the bonds sustained their triple-A status with minimal stress to investors, Salmon said. "There is a very strong proactive role played by the surety bonds, especially when there is a risk of a claim against their surety policy," he said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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