More than one year after placing 32 classes of auto least ABS on watch for a downgrade (see ASR 5/19/03), only to subsequently reverse course and remove the watch on many securities, Standard & Poor's recently addressed its controversial stance on the risks associated with the Pension Benefit Guaranty Corp. (PBGC) assessing a lien on lease receivables due securitization trusts in bankruptcy.

S&P's stance in the report, issued in August, the rating agency is that it will not treat sponsors rated below AAA' as bankruptcy remote when assigning AAA' ratings on these auto-lease deals. The report used a recent high-profile bankruptcy - US Airways - as an example of the potential damages the PBGC can represent to the underfunded pension plans of any company in bankruptcy.

Prior to filing bankruptcy in 2002, the company filed its form 5500 (disclosing its pension funding status) the previous year, reporting its pension was 94% funded. When the PBGC assessed the situation, after two years of general vested equity asset depreciation, the PBGC calculated the pilot's pension plan was actually 35% funded - a $2 billion shortfall.

This case, decided on Dec. 29, 2003, set a bankruptcy-court precedent on pension fund valuation, S&P reports, despite it conflicting with previous court decisions on the subject.

"Pension information filed by sponsors may not capture the current health of a pension plan given that the information is almost two years old by the time it is available to the public," write S&P analysts Felix Herrera and Michael Binz. "Therefore, any analysis or conclusion with respect to the status of a company's pension plan is difficult when variables that impact the status of a plan, such as interest rates and values of financial assets, are changing significantly."

Noting that typical auto-lease ABS issuers have unsecured ratings "significantly below those of the highest rated asset-backed notes sponsored by their auto lease subsidiaries," the agency continues to view this as a significant risk, and notes three issuers: Chesapeake Funding, GMAC and Nissan Motor Credit, which have perfected the lien to the titling trust, therefore protecting ABS holders.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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