Mexico's Metrofinanciera filed for a prepackaged bankruptcy with a court in Monterrey, Mexico, in mid-August and is waiting for approval. The originator has stopped making payment on a range of obligations.

Where the bridge loan ABS investors fit into the restructuring remains unclear and is further complicated by the fact that there was never a rectification of the company's systematic diversion of funds away from the ABS trusts during 2007 and 2008.

Merrill Lynch is advising Metro in the restructuring, while White & Case is acting as the company's legal counsel, according to sources familiar with the process. Local firm Mijares, Angoitia, Cortes & Fuentes is legal counsel for a holder of secured debt and a group of pension funds holding structured deals.

Officials at these three companies either declined to comment or did not return requests for comment. A Metrofinanciera official declined to comment for this article.

As part of the tampering with its ABS trusts, homebuilders that owed the construction loans in the collateralized portfolios would deposit payments with the company instead of the trusts. Then Metro would, at its whim, return a portion of the money to the trust and keep the rest, presumably, sources said, to boost its assets or make debt payments.

In late 2008, the flows from securitized loans that never made it to their rightful vehicles were estimated to total Ps4.19 billion ($307 million). At last count, the shortfall reached Ps6.8 billion, according to the company's own annual report released mid-summer. (See table.)

But the amount owed to each trust varies dramatically, adding yet another wrinkle to the restructuring process.

While most of the deals have local investors - seven of the 10 trusts are domestic - there are two that the company issued abroad. One of them, curiously enough, was actually being held by Metro itself or one of its units while the funds were being diverted, according to a source close to the company.

Fideicomiso 123 corresponds to 2005-1 notes arranged by Dresdner Kleinwort Wasserstein and wrapped by Ambac in what was the first deal in the Mexican real estate sector to carry a monoline guarantee. The deal went to 11 investors.

But in early 2007 Metro bought back the entire deal, including a $60 million subordinated piece, apparently because the company was dissatisfied with the amount of excess cash flowing back its way from the structure, according to a market source at the time. Metro then retired the B notes but held on to the senior notes after stripping off the insurance policy.

Eventually that paper was used as a guarantee for a 1.5-year Ps905 million loan that related unit Fondo Inmobiliario Banco de Tierras borrowed from Banco del Bajio in April 2008. Banco de Tierras is used to purchase land for Metro's projects, said a source close to the bank.

The notes that came off Fideicomiso 650 totaled Ps1.62 billion and were issued under 144A regulations in the U.S. in July 2007. The tenor was seven years. Other details were unavailable.

Details for the paper placed by Fideicomiso 689 are even sketchier. The five-year notes amount to Ps1 billion and formed part of a Ps3 billion program.

With Metro unlikely to undo the damage to its trust anytime soon, the holders of the bridge loan ABS may find they're stuck with the other creditors once the Chapter 11 is approved.

At any rate, the deals themselves, weakened by the sharp slowdown, have been performing dismally regardless of where else the originator has failed to meet obligations. In early August, the Metrocb 03-2 and 03-2 formally defaulted when trustee Banco Invex announced that part of the principal payment was missed for each deal.

This happened after the structure had drawn the 14.2% guarantee provided by state agency Sociedad Hipotecaria Federal (SFH).

"The SHF guarantee covered the coupon of three months ago, but for this [coupon] it wasn't enough," said Roberto Guzman, associate director at Fitch in Monterrey. Other tranches of bridge loan ABS have yet to formally default, but are on the brink.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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