A recent $500 million transaction by Miami-based investment bank BayView Financial Trading Group took advantage of an atypical revolving structure that allows mortgage loans to be placed into the security in groups, all of which are subject to review.
The structure, used in BayView Financial Revolving Mortgage Loan Trust 2000-D, has only been used two other times. Lehman Brothers used the structure in early 1999, and BayView used it in a similar deal, also in 1999.
Blocks of loans can be inserted or removed into the trust for the first three years. What makes the structure viable is that it reduces credit risk associated with normal revolving deals.
"They're issuing one set of notes and there's no prepayment risk for the investors for the first three years because any extra space in the deal gets made up in CP that balances out to the total of the notes," said Diane Westerback, a vice president at Moody's Investors Service, which rated the $384 million in mezzanine and subordinate tranches Aa2 to Baa2, and the $116 million in commercial paper Prime-1. "Things may change over time, but the outstanding note balance is consistent."
The groups of loans that are placed into the trust act as mini-securitizations in itself, as the pool gets reviewed before it is placed into the security. This adds to the credit support of the transaction.
"You can't always control in a revolver the combination of those factors; you can try, but there's still always some risk," Westerback said. "In a normal revolving [structure], you would normally size [risk] to the worst-case combination of factors that is reasonable given the rating level. Whereas in this case, we're looking at it, at least the collateral anyway, as a series of term transactions. It gives them a little more flexibility of what they put in, and it gives us more review and more ability to review and ask questions or adjust levels."
This structure, because of its ability to use assets that wouldn't normally be considered under a typical revolving deal, has potential to be used by many other issuers.
"You can allow variability on credit quality or it could allow you to securitize assets that may not be as uniform as you might typically see in a regular revolving structure," Westerback said. "You could accommodate idiosyncrasies or specifics of a particular issuer's portfolio or different groups of loans which is kind of ideal for them."
Recently, BayView has been moving up the credit spectrum, and has become a fairly regular issuer since 1998, with four deals this year. Representatives from BayView did not return phone calls.