As lackluster volume in the private ABS market has disappointed investors, bank structurers abroad have begun gearing their more esoteric transactions, particularly whole company securitizations, to tap the U.S. bid.

"While the public market, with large liquid deals, has expanded, the private market has experienced a contraction," said Blake Murphy, a director heading up distribution in the New York securitization group of Rothschild Inc. "So accounts that need to look at esoteric assets, and need to be focused on doing more work to capture more spread, have to cast a broader net."

Last week Rothschild placed a portion of the GBP350 million Isle of Man Steam Packet Co. whole company securitization with a U.S. investor, swapping the cashflows to dollars, which is traditionally a challenge as whole business deals are generally longer-dated, in the 20-year plus range. The deal, structured in the U.K. by NM Rothschild & Sons, has a 5.2-year average life/10-year final, and priced at 350 basis points over GILTs. The bulk of the triple-B-rated transaction was placed with institutional investors in the U.K by Rothschild and co-manager ABN AMRO.

"To date, we've pretty much seen almost an exclusive U.K. interest in the whole business deals, which is primarily a function of the long-dated sterling aspect of most of them," said David Cain, a director in the securitization group in the London-based Rothschild, and structurer of the transaction.

The recent whole company securitization from Leicester City plc, a U.K.-based football team, was said to be structured with U.S. investors in mind as well, and had portions placed with U.S. institutions.

Even with structural enhancements, investor education has been a challenge in placing these deals with U.S. accounts, though interest in the asset class is clearly developing, Rothschild's Murphy said.

"It's a U.K. law phenomenon that allows the whole business deals to really germinate," Cain added, describing the favorable legal structure and sale opinion. "U.K. investors are obviously a bit further up the curve, because, although whole business deals have only been around for a few years, the gist of it - the secured loan and the legal precedent - has been around for 100 years, so it was a much easier thing for investors to understand on this side of the pond."

Cain, formerly at Chase Securities, worked on the first whole company securitization, Welcome Break, in 1997. That GBP325 million deal securitized roadside service businesses, such as fill-up stations and restaurants.

The Steam Packet deal

Isle of Man Steam Packet is a wholly owned subsidiary of Sea Containers Inc., which had acquired the ferry service in 1996. Sea Containers is a familiar name in the securitization market, having sold $283.9 million of shipping container receivables into Variable Funding Corp., a Wachovia Securities ABCP conduit, last summer.

What makes the Steam Packet transaction unique from its predecessors is that securitization was done in lieu of an asset sale.

Sea Containers, being a single-B credit, was looking for ways to raise funds, and considered selling off Steam Packet, but viewed it as a core part of its business.

"Rothschild proposed using a whole company securitization as a means of realizing value off of its investment, while at the same time maintaining the equity upside in the transaction," Cain said. "That is a first for the whole business deals. It's moved from the buyside to the sell-side of an M&A transaction, and it's going to be a very powerful tool [going forward]."

The transaction securitizes the earnings stream associated with Steam Packets operations. The underlying collateral are the assets of the company, though the evaluation of the company as a going concern, which is the securitization analysis, allowed the company to borrow just under six-times EBITDA at the triple-B level.

"The breakup value of Steam Packet is far less than the value of the company as a going concern," Cain said

The transaction proceeds are roughly 106% loan-to-value, if looking purely at the liquidation value of the company. Using a going concern evaluation, the LTV is approximately 65%.

The securitization relies heavily on a concession Steam Packet has with the Isle of Man government, whereby Steam Packet is the exclusive roll-on/roll-off ferry operator, a contract that lasts for the life of the transaction.

Whole company versus pub

As the U.K whole company market continues developing, it now distinguishes between whole business securitizations such the Steam Packet deal, and pub securitizations, such as the Punch Taverns deals, the first of which closed shortly after Welcome Break, in 1997, Cain said.

The term whole business ABS is generally being used to describe an operating company securitization, such as Rank Hovis McDougall - a flour and food servicers company - and the two previous ferry deals, Red Funnel, and Wight Link.

The legal structure used in the whole company and pub deals is essentially the same. Each is structured through an SPE that issues a secured loan to the company, taking a charge over the assets. However, the underlying credit analysis is different in the two types of transactions.

The whole business deals involve a more traditional corporate-like analysis, where the asset value rises and falls in line with the company. The pub deals, on the other hand, are generally backed by a diversified pool of individual cashflows, generally linked to between 2,000 and 3,000 independent pubs. The GBP1 billion General Healthcare Group transaction, which Morgan Stanley London brought last summer, is associated with about 60 hospitals and falls somewhere in between.

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