In a rarity for the asset-backed market, investors and rating agency sources were informed last week that Enterprise Mortgage Acceptance Corp. (EMAC) failed to make servicer advances to trusts on its securitizations.
EMAC has been notified that it will no longer be the primary servicer on its deals.
Allegedly, parent company Koch Industries decided it would no longer fund EMAC, and, in turn, the franchise finance subsidiary was essentially spent of capital, and unable to advance payment on loans in the transaction pools.
In this case, the asset-backed structure worked as designed, as LaSalle Bank, the indenture trustee, stepped in to forward payments. It is understood that GMAC Commercial Mortgage is the front-running candidate for replacement servicer.
"I think what happened is that EMAC has been working with GMAC for a while, and this was their intended plan," said one insider. "The news seems shocking, but it's been in the works."
Last week, LaSalle informed investors that it had already contacted Franchise Finance Corp. of America, Amresco Commercial Finance, Midland Loan Services and ORIX Real Estate Capital Markets, when it learned that EMAC was nearing an agreement with GMAC.
Unfortunately, for investors in EMAC securitizations, the backing of Koch was one of the selling points, said Fitch analyst Paul McCarthy. Koch, which is best known for its petroleum businesses, is one of the largest privately owned companies in U.S.
"It was a comfort factor with the EMAC deals, that Koch was behind the company, and it turns out they're only behind the company when times are good," McCarthy said.
EMAC will be retained as an interim subservicer, so the workouts on the defaults will not be necessarily interrupted.
Last week, Fitch placed all classes of all EMAC transactions on watch for downgrade. The week prior, Fitch had downgraded several classes of EMAC securitizations, while Moody's Investors Service placed several on ratings watch negative (see ASR 4/16/01).
Moody's said that 28% of the 1991-1 pool was delinquent by principal balance, and approximately 20% of the 2000-1 deal is delinquent.
An insider said that much of the portfolio deterioration in both pools was tied to the default of one borrower, an owner of Convenience USA concepts. The default accounts for 16% of the 28% default rate in the 1999-1 series, the source said.