The most widely publicized securitization deal in the European asset-backed market's history, a packaging of TV and other revenues for Bernie Ecclestone's Formula One motor racing business, finally saw the chequered flag at the end of May, but whether joint leads Morgan Stanley Dean Witter and Westdeutsche Landesbank (West LB) will be standing on the podium spraying champagne depends on how much is finally placed with investors.
The deal, which was originally to be lead managed solely by Morgan Stanley, has undergone significant revisions since it was first shown to investors last year (ASRI, 10/19/98, p.3 and 11/30/98, p.2), and both banks say it is proving more palatable in its new guisse. The restructuring came at the behest of West LB, which, incidentally, was originally approached by Morgan Stanley as an investor.
"It would be too strong to say that we rescued it," said Andrew Gardner of West LB's securitization group. "We just said to Morgan Stanley that if they were to do it in a certain way it would appeal to us a lot more and probably also to other investors, and that would be sufficient for us to underwrite a portion of the deal. The proof of whether we are right will come over the next couple of weeks or so as we continue to sell it to investors."
Of the changes that WestLB and Morgan Stanley came up with, the most obvious is a halving of the final maturity to take account of Ecclestone's intention to repay the bonds with the proceeds of an IPO sometime in the next three to five years and to reflect the end of Formula One's exclusive contract with motor racing's governing body, the FIA, in 2010. As a consequence, the deal's size has come down from an intended $2 billion to $1.4 billion.
The structure has also changed to lock in cashflows, so that any surplus cash within the business is used to pay off bondholders, rather than passed to equity investors, and to incorporate a limited guarantee, backed by a $100 million liquidity facility and a $300 million reserve provision retained by the Formula One company and to be released, subject to rating agency approval, when the deal has seasoned.
The new structure, and in particular the reduction in the final maturity, means that the bonds are close to being covered by proceeds from current TV, promotion and merchandising contracts, but the rating agencies pointed out that the deal is not a traditional bankruptcy remote securitization and still contains an element of business and performance risk.
However, this has not stopped all the four major agencies from giving the bond a single-A status and, crucially, Standard & Poor's is now on board. Market sources said that one of the reasons investors had been shy of the deal as it was first mooted was because of suggestions that S&P had refused to award it a single-A rating.
"We wanted to be careful and make sure that we had all the rating agencies lined up before it closed, and that is why you've got a slightly unusual strucutre whereby the issue is launched, priced and closed on the same day," Gardner said. "It is effectively a bought deal by Morgan Stanley and WestLB and we are now actively placing it."
A Morgan Stanley official added that initial concerns about a possible challenge from the European community's competition authorities concerning the validity of Formula One's contracts with the FIA and with broadcasters were overdone. "There is no question that they don't own the rights or that they can be taken away, and the rating agencies have confirmed that," the official said.
The two banks declined to disclose what percentage of the bonds each will underwrite, but sources suggested that an approximate 50/50 split is likely.
Other deals that came to market recently included two U.K. mortgage deals that confirm the U.K. MBS market continues to be dominated by deals backed by non-vanilla mortgages from specialist lenders, despite suggestions that the bigger mortgage lenders would soon be securitizing their huge portfolios of standard housing loans.
The most notable was a GBP185 million transaction for Paragon, a specialist buy-to-let lender, lead managed by J.P. Morgan. J.P Morgan stressed that the underlying assets - only 12% are owner-occupied mortgages - are not comparable to subprime or non-conforming loans, and said that the deal was priced in line with bank-originated products.
The other U.K. mortgage deal came from regular issuer Ocwen U.K. and was lead managed by Barclays Capital. The GBP187 million deal was backed by a mixture of first charge and second charge mortgages and priced in line with other non-conforming mortgage deals that have come to market this year.