With hardly a glitch in the pricing process, the first visible multiline insurance-wrapped transaction since the AIG/Hollywood Funding debacle quietly passed through the Rule-144A ABS market recently, sources said, faring quite well despite investors' tremendous need for comforting and coddling from the rating agencies prior and during launch. A separate deal, however, done as a traditional private, is believed to be the first actual multiline-wrapped deal since the AIG controversy.
The former transaction, World Omni 2001-A Automobile Lease Securitization Trust, a 144A for $945 million, priced last month and had a residual value insurance policy from Chubb Indemnity Insurance Company providing coverage for the residual value losses of the leased vehicles upon turn-in at maturity. The multiline company's policy is a property and casualty insurance-style wrap, similar to the one used on the infamous Hollywood Funding deals, which were downgraded from AAA' to D' by Standard & Poor's earlier this year when AIG subsidiary Lexington Insurance refused to pay out to investors. Moody's did not participate on the AIG transaction, but did rate the World Omni deal.
According to market sources, the rating agencies arranged several conference calls with investors after rating the deal in order to express their comfort level with the Chubb wrap and impart the fact that the deal featured several layers of protection in addition to the multiline policy.
"Investors were really concerned with the risk associated with multiline wraps," said Alex Dill of Moody's Investors Service, who rated the deal and participated in the teleconference with investors during the marketing stage of the transaction. "There needed to be several backstops and bells and whistles thrown onto this transaction in order to get us comfortable with it."
"We certainly carefully reviewed the policy to be sure that Chubb's obligation to cover residual losses was unconditional," said Jay Eisbruck of Moody's.
Standard & Poor's, who rated the Hollywood Funding deals, did not return phone calls by press time.
According to Dill, the main concern from investors was Chubb's willingness to make payments to the issuer under the insurance policy. However, Moody's cited several reasons for why they believed refusal to pay was a remote possibility, including the fact that Aa1-rated Chubb has a very low level of exposure to residual risk in this transaction. Additionally, according to an in-depth default analysis, several sources of enhancement on the deal will absorb residual value loss before Chubb would incur a net loss position on residual loss claims payments.
Several layers of protection were tacked onto the deal, including a separate reserve account to protect Chubb and a reimbursement obligation by World Omni. The issuer, which has used insurance wraps for most of its deals, has had an ongoing reimbursement arrangement with another insurance company for many years, Dill said. "In the event World Omni defaults on its reimbursement obligation to Chubb, Chubb will have reinsurance coverage provided directly by World Omni's own residual value insurer in excess of a relatively low level or residual losses," Dill noted.
"In this case, the Chubb policy was the fifth or sixth line of defense," added an investor that had looked at the deal. "This is a slightly different situation than Hollywood Funding. In that situation, AIG completely wrapped the whole thing, whereas in this case only the excess spread was wrapped."
The rating agencies' work seems to have paid off. The deal, led by BofA and Merrill Lynch, tightened from price talk, with the $278 million, two-year piece pricing 1ML+19 (compared to low-20's price talk) and the 3.12-year tranche, for $270 million, pricing at 1ML+27.
Some sources said, however, that the true-private market actually saw the first ABS with a multiline wrap since AIG/Hollywood, when William Blair & Co. came to market in early April with an equipment deal. The transaction, Frontier Equipment Receivables 2001-1, was worth $61.75 million, and had "the benefit of an insurance policy" from Great American Insurance Co.