In what could be the most important showdown for the manufactured housing sector of the ABS market, bondholders - led by a practically defaulted B2 class ABS holder - hope to trump CFN Investment Holdings in the reorganization plan of bankrupt Conseco Finance. At issue is the treatment of the servicing fees for the issuer's MH trust.
Thus far, the only proposal submitted to bankruptcy court is from CFN. CFN would like to increase fees to 125 basis points from the current 50 basis point fee, and make half of the increased fees - 75 basis points - senior in the payment structure. The plan essentially increases profitability of the serving operations, at the expense of subordinated ABS holders.
In its 2003 Outlook on the sector, Credit Suisse First Boston researcher Rod Dubitsky outlines the proposal and states: "We have not seen any proposals addressing the resolution of the B-2 guaranty bonds."
Now sources report that an investor in GT/CF subordinates, specifically 2000-A BV2 bonds, is reportedly mobilizing bondholders to keep servicing fees in place and prevent a raiding of the trust. A meeting reportedly took place last Wednesday, with representatives from housing agency Fannie Mae in attendance, as well as many in the investor community, sources said.
While these bonds have long been distressed, investors have been eyeing them more and more, as word of the more bond-friendly proposal has circulated. The B2 bonds have traded inside of the more senior B1 bonds for some time and shortly after talk of a new restructuring plan hit, were quoted 1000 basis points through Conseco senior unsecured debt.
CFN, a buyout specialist owned by a trio of investment and asset managers, has a more equity-friendly deal on the table that would both increase and un-subordinate servicing fees at the expense of sub ABS holders. The least subordinated of these bonds just happen to have a unique form of credit enhancement: a corporate guaranty.
Leading CFN's charge is reportedly Fortress Investment Group, which buys "common stock investments in private and publicly traded finance and real estate-related companies," according to its Web site. "Fortresses assets [are] acquired through bankruptcies and restructurings."
Serving as a precedent for fellow bankrupt MH lender Oakwood Mortgage - which is viewed by most as a more manageable portfolio - the MH sector hangs in the balance. Can a lender be profitable earning just 50 basis points for its serving operations? Will an investor ever buy subordinated MH ABS if, in a servicer insolvency, sub cashflows are the first to be raided?
This scenario was seen coming long ago, as Conseco's servicing fees are much less than most MH lenders. The most financially healthy lender in the sector is Vanderbilt Mortgage, which charges a 125 basis point servicing. Oakwood has a servicing fee of 150 basis points, putting it in a better position, numerous sources said.
"This is strictly a servicing fee issue and the MH sector will be dealing with this for years to come," said Nomura Securities research director Mark Adelson.
Rating agencies, with no other proposal to scrutinize, have begun assuming CFN's increased and more senior fees, and as expected, the move "reduces the amount of excess spread available to protect certificate holders against losses," Moody's Investors Service said in its most recent round of downgrades, in which it cut the ratings on 118 classes of GT/CF MH ABS.