The tug-of-war between ABS bondholders and Conseco Inc. picked up steam last week, insiders told ASR. While little to no progress was made during recent negotiations, pressure from the bankruptcy court judge, Carol Doyle, could lead to a resolution sooner than previously thought. Whatever the outcome, it will surely be a precedent setter for securitizations in servicer bankruptcy.
As previously reported, in the reorganization plan submitted as part of the Dec. 17 Chapter 11 bankruptcy filing, CFN Investment Holdings would acquire the Conseco Finance unit and take over the all of its servicing platforms. In order to make the servicing profitable for CFN, Conseco asks that fees be increased to 125 basis points from the current 50, removing 75 basis points from the excess spread cushion.
A familiar plot line at the heart of this conflict involves the trustee, U.S. Bank Corporate Trust Services, which would seemingly prefer that CFN win the servicing duties, rather than having them fall into its lap. U.S. Bank received a "get out of jail free" card in this regard last Wednesday, as Fannie Mae agreed to a "floor bid" in which it would purchase the MH servicing platform for $70 million, in the event that Conseco, CFN and bondholders fail to reach an agreement by the Feb. 28 deadline.
ABS players allege this proposal is an attempt to steal the excess spread from ABS holders and essentially create an I-o strip, paid to the servicer. Rather than signing off on the first (and only) proposal officially submitted, ABS holders are arguing for a negotiating process to decide the proper fees and their place in the capital structure. Put in the middle is U.S. Bank, which as trustee has a responsibility to protect ABS investors, but seemingly prefers to not take on the servicing duties for the largest existing MH portfolio.
As of press time, motions and objections were being filed by all parties and no decision had been announced. Last Wednesday, Conseco withdrew its petition to release it from its servicing obligations, adding that more time is needed to resolve the situation. Conseco claims its servicing operations lose $15 million per month.
"Whoever is yelling the loudest is being heard," an investor said. "All the rules regarding certificate holders have been broken," another investor added. While there are conflicts between unsecured debt holders, B1 class holders and CFC B2 guaranty note holders, most of the noise, until now, had been coming from debtor-in-possession provider CFN.
Holders of the B1 bonds, without the additional backing of the guarantee of the corporate parent, currently have the most to lose as there are "several years of cashflows" expected from these bonds. The B2 guaranty holders, by contrast, lose just about everything if CFN wins the bidding, sources close to the situation explained.
Despite several extensions to the proposal deadline (most recently granted Feb. 12) and numerous conference calls hosted by the various bondholder committees, the first ABS holder proposal is expected shortly, with one more to follow. Without a unilaterally agreed-upon reorganization, this process is likely to drag on. "This won't get done without a consent decree on behalf of all sides," said a knowledgeable legal source away from the situation. Citing a bankruptcy judge's propensity against the appellate process, he added, "This can't drag on in appeal for 10 years."
While this was a topic of many panel discussions during this year's ABS conferences in Arizona, the only person speaking out publicly about the reorganization issue was TIAA-CREF portfolio manager John Cerra. He repeatedly stated that the final outcome will have implications, not only on the MH sector, but on the entire asset-backed (or fixed-income) market. Speaking as a panelist on the opening general session, Cerra called the lack of ABS investor and trustee support on the issue "disheartening." Cerra is part of the committee representing A class, M1 class, M2 class and B1 class ABS holders.
Referring to what he called the "Conseco bankruptcy maneuver," he believes there is potential for a dangerous precedent to be set. Cerra explained that going forward - depending on the outcome of this dispute - bankers and lawyers may see greater value in a bankrupt company, versus a company out of it, which is governed by certain disadvantageous, but prearranged, financial covenants.
Cerra speculated that the resolution "could have implications on your entire portfolio," especially if Conseco succeeds in rewriting the documentation and covenants of the servicing agreement. This debate, when finally settled, will go a long way in determining what servicer fees a lender must charge to remain profitable.
Many investors take the myopic view, however, that the war is not worth fighting. More concerned with the short-term performance of their portfolios, than the broader implications, many are leaving Conseco for dead. At the conference, panelist Sean Kirk, trader at distressed-bond boutique United Capital Markets, recommended selling "sooner, rather than later." The reasoning, he said: "Because by the end of the year, these bonds will be worth less than they are now."
Still, while many investors do not want to see covenants rewritten at the expense of the trust, the profitability of servicing is vital to the market. "I want my servicer to make money from its operations," added Trustmark Insurance portfolio manager Lisa Wilhelm-Haag, speaking at the IMN gathering.
Therein lies the problem with Conseco, noted Moody's Investors Service analyst Pramila Gupta, who has rated the majority of MH ABS in existence - servicing profitability was a secondary concern for Conseco in this case. "Conseco's goal with its servicing strategy was to maximize the excess spread in its trusts by using gain-on-sale accounting," she said at the conference.
Regardless of intent at the time, Conseco made its own bed and should now be made to lie in it, rather than pulling the sheets from subordinate ABS holders. "A servicer has contractual agreements," Gupta added. "Investors don't expect to be overridden when the chips are down."
TIAA's Cerra agreed with Gupta, noting that mistakes have been made by all, and that "we are starting to pay for some of these past mistakes." He continued the broader-market theme by adding, "How we handle challenges will determine whether ABS continues to grow, or just becomes a specialty, niche, market...We are a very immature market, when it comes to hard work."
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