During last week's briefing at the Sofitel Hotel in New York, Moody's Investors Service primed investors on what they can expect from esoteric ABS moving forward, aside from delays and protracted lead times.
Analysts addressed insurance-related transactions, private equity-backed deals, intellectual property, franchise loans, aircraft leases and time-shares.
On the insurance front, collateral types included senior settlements, life insurance/annuity arbitrage, corporate- or bank-owned life insurance commissions (COLI/BOLI) and life insurance premiums finance. Legacy Benefit Corp.'s $70 million A1'-rated transaction, which closed in February, represented the first senior settlement deal rated by Moody's, said Rochelle Tarlowe, vice president and senior analyst. However, the rating agency is fielding calls from interested parties, and expects more market entrants. To become a viable asset class, mortality analysis must be improved and origination needs to be streamlined by eliminating some of the smaller players, Tarlowe said. Analysts are also starting to see an increase in life insurance premium finance transactions.
Patron's Legacy is behind the four life insurance/life annuities arbitrage deals that have been completed to date. There are several more in the pipeline, Tarlowe said, all of which are expected to be 144As for at least $100 million. However, because the arbitrage on these deals results from the life insurance companies offering policies based on longer life expectancies than the annuities, it will largely disappear as soon as one of those estimates is proven wrong. "In three to five years, the arbitrage will narrow," Tarlowe said. "There is a small window to execute these deals."
The rating agency is expecting limited issuance of deals backed by COLI/BOLI commissions. To date, Moody's has rated a single transaction (see p. 12).
Moody's has rated three of the six private equity transactions in the market, the largest of which was an $860 million offering called PineStreet managed by AIG, which closed in 2002. Analysts expect the domestic market to be relatively quiet for private equity in light of questions raised both in FIN 46 and the Sarbanes-Oxley Act regarding off-balance sheet treatment. However, there are several transactions underway outside of the U.S.
Intellectual property transactions were broken down to include those backed by music royalties, film receivables, trademark licensing, franchise fees and patent licensing royalties. Future film receivables transactions could adopt new structures. For example, a deal could be structured to take on production risk or with a pool composed of films across studios, said Myrna Ekmekji, vice president and senior analyst. "The film structure has evolved rapidly," she said.
Of the two primary revenue streams securitized in the music royalty sector, publishing rights have held up well, Ekmekji said. However, record master rights have been hit by piracy. The single music royalty transaction lined up for 2004 will likely be backed by publishing royalties, she said. Meanwhile, trademark licensing and franchise fees could account for four new deals in 2004. There may be two or three deals backed by patent licensing royalties.
While two or three franchise loan deals may be completed in 2004, the sector continues to suffer. Close to 15% of 2003 volume in the sector has been downgraded. Analysts are hoping to see more realistic valuations, smaller advances and more tangible collateral in the future.
After downgrading 13 aircraft lease deals in 2003, for a total outstanding of $10 billion, Moody's has downgraded three deals in 2004 due to reduced cashflows and increased maintenance expenses. Consequently, the ratings range of senior classes has widened. Class A notes now fall anywhere between Aa2' and B3'. The trend in aircraft lease heading into next year is repackaging, analysts said. Moody's has rated two repackaged deals, both of which were led by Morgan Stanley and serviced by GE Capital.
Time-share securitization volume could hit $1.2 billion in 2004, according to Andrew Lipton, vice president and senior credit officer. Judging from the rate at which warehousing facilities are filling up, six or seven new deals could hit the market this year. "This is a heady time for time-share developers," Lipton said. "They have weathered an economic downturn, 9/11 and do-not-call rules." However, increases in time-share prices could threaten growth and have a negative impact on receivables, he said.
Copyright 2004 Thomson Media Inc. All Rights Reserved.