Ford Motor's Globaldrive Series D transaction, back by German auto loans, will begin repayments on 800 million (US$946 million) of outstanding notes after breaching an early amortization trigger in March. The situation is not surprising, market sources said. Based on the performance of the deal, investors have been expecting this for some time.

Some view the event as positive, as early amortization is structured into the deal for the benefit of investors to mitigate credit loss. In essence, the deal is working as it should. Others believe the triggers in European auto deals are set too conservatively to offset initial thin credit enhancement levels. Industry sources believe that this situation may not be isolated to the Globaldrive deal, but rather part of a broader trend of European auto loan securitization programs, and that more early payouts are on the horizon.

Both Standard & Poor's and Moody's Investors Service have affirmed ratings on the senior and junior notes of the transaction. According to S&P, the early repayment disallows lower quality loans from being placed in the collateral pool, which reduces the potential for further defaults going forward. The transaction is provided additional credit enhancement via the increased junior cash collateral account.

In December 2003, two-month average annualized losses reached 0.77%, which hit the cash trap trigger, set at 0.75%, Moody's analysts said. Available excess spread previously paid to issuer FCE Bank plc has been used to increase the junior cash collateral account.

In its write-up, Moody's said that when the cash trap is triggered, the junior reserve account must increase to 48 million. Following an early amortization, the account must be maintained at the level it was when the rapid payout began, or 50% of the principal outstanding. "During the period from December (when the cash trap trigger was hit) to March (beginning of early amortization), the junior cash collateral account increased to 26.37 million," Moody's writes.

Both agencies added that going forward, no further replenishment is expected. The senior notes begin repaying this month and the junior notes will receive principal

payment once the senior notes are fully amortized.

According to analysts at Deutsche Bank, Ford's earlier Globaldrive Series B and Fiat's Ease deals have breached economic triggers. Peugeot's Auto Compartiment 1 transactions have come close as well.

The triggers in the Globaldrive D transaction make up for the relatively thin credit enhancement inherent in the transaction structure. "Clever issuers sometimes prefer to trade true subordination or upfront cash for tight triggers," said analysts at Merrill Lynch. While for the most part this is a favorable solution, it can result in lower sustainable losses for the notes if the time between the cash-trapping trigger and an early amortization trigger is short. Otherwise, the excess spread is directed to the reserve account for too long a time, to the detriment of the servicer.

According to a Merrill report on the sector, the Globaldrive D transaction contains a feature that allows it to stop trapping excess spread and begin releasing funds to Ford after the early amortization is triggered. Ford said, however, that it would continue directing cash to the reserve account based on a higher target level.

This feature, which allows the seller to continue collecting a portion of the cashflow even in early amortization, is not structured in most U.S. auto deals.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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