Though different parties to the National Century Financial Enterprises securitizations have been scrutinized for not pursuing the more obvious red flags - such as accusations of fraud, lawsuits and misappropriation of funds - a few mouse clicks through Edgar's company search reveals a small flurry of obligor-level disclosures pointing to stress and questionable dealings in the NCFE healthcare receivables trusts.

Of course, one of the day's most heated arguments involves the level of due diligence required by the different parties to a securitization.

"You could make the argument that someone should have been reviewing the financial documents of the underlying borrowers as part due diligence, but that is a serious, time-consuming undertaking," said a ratings source.

Last week an ASR reader pointed out some shocking passages from PhyAmerica Physician Group's September 2001 10-Q filing with the Securities & Exchange Commission. For one, the company openly disclosed that nearly 72%, or $187 million, of the receivables it had sold into its various NCFE facilities had yet to be generated. PhyAmerica carried these obligations - essentially unsecured loans - on its balance sheet as long-term debt.

This is significant on several levels, the source argued. For one, it is pretty clear that PhyAmerica had been struggling. Though NCFE had touted itself as the only source of financing for many of its lenders, the fact that PhyAmerica's yet-to-be generated receivables dwarfed its actual receivables, would have raised eyebrows if disclosed in the NCFE offering memoranda.

During an investor conference call that took place last November, one caller queried a ratings analyst as to the proportion of "pro forma" receivables backing the NCFE securitizations. This was essentially unanswerable at the time. The question is whether or not NCFE was financing ineligible receivables through the securitizations.

According to a rating agency analyst familiar with the deals, yet-to-be-generated receivables, or "billable amounts" - as referred to in the deal documentation - can be eligible to the extent that they are approved by each of the rating agencies. "The request was never put forward to approve a billable amount," said one ratings source, implying that this stuff shouldn't have been securitized.

At this point, it's unclear whether or not these so-called future receivables were financed via NCFE's securitizations; still, investors would have been well served to know the true credit worthiness of the healthcare providers, and any other relationships the sellers had with NCFE.

Most of NCFE's borrowers were not publicly traded companies and were not disclosing their arrangements with NCFE. However, of the disclosure histories roughly compiled in the chart to the right, three out of four would arguably have raised questions as to the financial stability of the borrowers and their levels of dependency on NCFE.

Still, one of the strengths of healthcare receivables, when arrived at with full integrity, is the delinkage between the seller's credit quality and the asset, as the ultimate credit is the insurance company or the government payers such as Medicare or Medicaid.

Moody's Investors Service is the only agency that still maintains ratings on NCFE's bonds. The formerly Aaa' rated senior notes from NCFE are currently at Caa3', some series as low as Ca2'. The subordinate bonds are rated as low as Ca'.

It's said that bondholders haven't seen payments since December 2002, partly attributable to the cash being tied up in the trust pending litigation.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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