Opinions are divided over the reach of the potential fallout from DamlierChrysler AG's decision to withdraw its $6.4 billion equity stake in Mitsubishi
Motor Corp., which leaves investors in the automaker's MMCA Automobile Trust securitizations to sit on the fence.
Joseph Astorina, associate director of research at Barclays Capital, said that he had seen a few of these bonds out on bid lists, but that most of them hadn't traded. "The current holders of these classes could be trying to get a mark on what their positions are worth," Astorina said, adding that the bonds have never been very actively traded. Other market sources have indicated, however, that subordinated pieces have traded in the 80-cents range.
The Mitsubishi family of companies is expected to rally around Mitsubishi Motor Corp. in an effort to line up alternative financing. There is also speculation that the Japanese government may step in to revive the flagging company, Astorina noted in a recent report.
The real danger for these transactions is if Mitsubishi should prove unable to find adequate funding. If that were the case, a messy servicing transfer could ensue. However, the transfer risk in this instance is substantially mitigated by the fact that Systems & Services Technology took over as subservicer on approximately 85,000 sub-prime Mitsubishi accounts in December 2002. "As such, SST is intimately familiar with the company's collections platform, and we believe it could easily step in as servicer for all MMCA transactions in the event of a servicing transfer," Astorina wrote in the report.
Not everyone agrees. "This will have a big adverse impact on the ABS. Large portions of each portfolio are balloon loans, subjecting the deal to residual risk," said one investor. "What kind of value are you going to get for a used car from a manufacturer that is no longer in business? These vehicles were never the best quality and had poor resale value to begin with. The servicing is not going to change this."
Katherine Lynch, a director at Fitch Ratings, expressed similar concerns. "The biggest risk to outstanding deals is the potential impact of what's going on with Mitsubishi Corp. on servicing capacity and ultimately, on vehicle disposition; when the manufacturer goes bankrupt, the cars are not as valuable," Lynch said.
Furthermore, while SST's qualifications as a servicer may be impeccable, the sheer volume of accounts could be a problem. "We are not sure if they have that capacity," said Fitch Director Andrew Chou. Nonetheless, having SST already in place as a subservicer would be a big plus in the event of a bankruptcy, he said. The initial 85,000 accounts represented about 15% of the portfolio in 2002. Currently, SST has about 60,000 of those loans still outstanding, Chou said.
Several transactions issuing from the MMCA Automobile Trust have suffered downgrades in multiple classes from all three rating agencies during the past year. The problems have been largely attributed to unconventional loan programs and the types of buyers these programs attract. In recent years, the captive auto lender has been working to burnish a more conservative reputation. "If you look at some of the pools in the later deals, they have already started to move away from some of the riskier account types," Chou said. Mitsubishi has also revamped its servicing shop and doubled its staff, he said.
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