Lexington Insurance Company (LIC), a wholly owned subsidiary of American International Group (AIG), which provided insurance policies on future-flow film securitizations by U.K.-based Flashpoint Inc., has told trustees in the securitizations that it will not honor the insurance policies on two deals that used insurance as a substitute for credit support.
In response, Standard & Poor's recently downgraded from AAA to CCC-minus Hollywood Funding No. 5 ($48 million) and Hollywood Funding No. 6. ($100.7 million). Credit Suisse First Boston was lead manager on both of these private transactions.
The Lexington policies were to provide for sufficient funds within about 20 days of a claim being filed to pay notes in full, should revenues in the trustee accounts fall short.
"Investors in this private transaction were relying on the insurance policy written by triple-A rated Lexington rather estimating the revenue the films were going to generate," said Kurt Sampson, a managing director in the London office of S&P.
Multi-lines have a history of asking questions first and paying later, which doesn't fit with the capital markets world where timeliness of payment is crucial, Sampson said. S&P felt it was critical that the public know how multi-line insurance companies can operate by making the Hollywood downgrade incident public. S&P said they believed the policies were to be unconditional and absolute. "It seems like S&P making the incident public to try to embarrass AIG and Lexington into paying up on the claims," commented one UK based portfolio manager.
Meanwhile, portfolio managers in Europe have been combing through their books looking at securitizations involving multi-line and monoline wraps following the downgrades. One investor said he and her counterparts are asking the investment banks that sold them the deals with wraps to have their lawyers look for outs that they should be worried about. One possible outcome is that multi-line and potentially even monoline insured deals will get more expensive for issuers, the investor added.
In the Hollywood No. 6 securitization, Lexington cited a controversial U.K. case that it claims discharges the insurer of liability. The case now under appeal is known as HIH Casualty and General Insurance Ltd. V. New Hampshire Insurance Co., and others. S&P notes that in the HIH case the insurer ultimately paid the amounts due under the policy.
For Hollywood No. 5, S&P based its downgrade on its understanding that Lexington told the trustee it will not pay on a claim on the policies pending investigation of claims of fraud, misrepresentation, and breach of warranty.
Contracts for both deals were written under U.K. law. U.S. investors and ABS heads surveyed summed the incident as, a multi-line insurance, UK law, AIG looks like the bad guy situation.
A broad sweep
Standard & Poor's said it is re-examining roughly between 70 and 80 AIG-insured ABS transactions as a result of the Lexington incident.
S&P is looking at AIG's absolute and unconditional obligation as well as its willingness to pay under any claims in ABS deals where the company or its subsidiaries are providing an insurance policy acting as credit support, said Thomas Gillis, chief quality officer for S&P's structured finance department.
Lexington Insurance Co. also wrapped Hollywood No. 4, which is performing, and is not under review by S&P.
"S&P's intention is to make sure the Lexington and AIG's claim policies are consistent with our ratings," said Gillis said.
"Either we'll come away from discussions with Lexington with sufficient comfort, [or] alternatively, we may request additional legal comfort," added Clifford Criep, S&P's chief credit officer. "The third option is that we may seek a substitute for credit support in deals involving Lexington."
S&P's review is reportedly starting with Lexington's deals under U.K. law and other securitizations involving AIG subsidiaries where insurance policies have been used for credit support.