The threat which the LTV Steel bankruptcy case posed to the core tenets undergirding the concept of securitization may have been fleeting, but market participants were nonetheless concerned last week that the lack of a litigated decision in the case would leave the door open for "true-sale"-related attacks to re-emerge (see Observation, p.20).
In light of this, many market observers have turned their attention to a largely ignored piece of pending federal legislation that would provide for automatic "true sale" treatment of many sales of assets into securitization trusts (see Observation, p.14). A little-noticed set of amendments contained in the Bankruptcy Reform Act - not adapted into law yet - could potentially revamp the entire process of true sale analysis, creating a safe harbor' provision that would permit a transferor to retain an interest in the issuer's securities.
"This could be potentially revolutionary in terms of how we approach bankruptcy analysis in securitization transactions," said Edward Gainor, a partner at the law firm of Brown & Wood, and author of a report on the subject (see p.14).
"Many of the factors we look at [for true sale analysis]...could almost be rendered irrelevant, such as recourse against the seller, buyback obligation, accounting treatment and control of assets. The legislation goes a long way, and allows some transactions to be done that could not otherwise be done," he added.
"We support this legislation very energetically," added George Miller, general counsel of the Bond Market Association. "Under clearly defined circumstances, for a transfer made in connection with a securitization, eligible assets would be excluded from the bankruptcy estate...This legislation would create efficiency and reduce costs."
Basically, the amendment would provide that non-delinquent "eligible assets" would not be property of the estate. The usual true-sale analysis would become somewhat different, Gainor said, in that counsel would not have to conclude that a transfer of assets is a true sale, but would have to state that the eligible assets were transferred to an eligible entity in connection with an asset-backed securitization.
The interpretation becomes more murky for sub-investment grade or non-performing assets: these do not constitute financial assets, so they may not be within the scope of "eligible assets."
"The SEC has not taken a position on that yet," Gainor said. "It's possible that we'll get comfortable with it. But there is the possibility that non-performing assets won't get included."
Resolved...for now
Last week, the LTV investors agreed to supply replacement financing through a DIP (debtor-in-possession). While this resolution averted a potential negative decision from the courts, it also robbed the securitization community of a satisfying conclusion to the LTV saga.
"Some people may view this as a lost opportunity," said the BMA's Miller. "We have no direct precedents on point for this, as all litigated cases in the past have been done in a context other than securitizations."
"The door is always open [to more attacks] if [the Bankruptcy Reform Act] is not passed," Gainor added. "The pressure on courts to make cash collateral available to keep a company operating is enormous."
