In its 10-K filing with the Securities & Exchange Commission (SEC), The Spiegel Group disclosed that it was not in compliance with agreements it had made with MBIA last May, when the two parties struck a settlement to quell the monoline's efforts to enforce a disputed early payout event.

Spiegel did not specifically indicate which of the conditions it is failing to meet, or by how much, though it's clear that Spiegel missed a Dec. 6, 2002 deadline set by MBIA to release its 10-K for fiscal year ending Dec. 31, 2001 (as the said statement was filed Feb. 4, 2003).

Spiegel did say it's in the process of receiving an extension, though it makes no guarantees. What's more, according to Spiegel, is that it hasn't been able to reach agreements with its unsecured creditors, and warns that for these, as well as a looming early amortization, Spiegel may not be able to continue as a going concern.

"MBIA is working cooperatively with Spiegel and FCNB, and we are confident that we will achieve full compliance with all of the terms of the settlement agreement," a senior company spokeperson at MBIA said.

According to documents attached to the filing, to avoid a payout event, Spiegel was to have a $600 million credit facility available to it by Nov. 22. On Dec. 1, the company was to have engaged and signed up a back-up servicer for the two MBIA-wrapped deals, Spiegel Credit Card Master Note Trust 2000-A and 2001-A.

Also by Dec. 1, the company was to increase its spread reserve account - maintaining a cash level based on different tiers of excess spread - against the wrapped portfolio to cover potential cash shortfalls that would otherwise be absorbed by MBIA.

Last April, Spiegel had received a temporary restraining order against MBIA and trustee Bank of New York, which kept the deals revolving until the company reached an out-of-court settlement based on the above and other conditions.

In accordance an agreement reached with Office of the Comptroller of the Currency dated last year, Spiegel is to sell or liquidate the bankcard portfolio of Spiegel's subsidiary First Consumers National Bank. As per a revised disposition plan submitted to the OCC in October, and approved in November, Spiegel has until April 30 to sell or liquidate the bankcard portfolio FCNB.

In its agreement with MBIA, the sale or liquidation must happen days prior to the OCC's extension date, which would land on April 15, or else trigger a servicer termination event in the SPMT deals.

It is rumored, however, that Spiegel intends to keep its private label business going if it can, despite earlier indications it meant to exit credit cards all together.

In March 2002, Moody's Investors Service placed several classes of FCNB 2001-A and FCNB 1999-A on watch for downgrade. Fitch Ratings, which only rated the 2001 notes, also placed those on watch. Both agencies have subsequently taken down triple-A classes of the respective deals to low double-A (Aa2'/'AA-').

Exercising restraint

Since the early payout event has technically been hit, MBIA retains the right the wind the trusts down, which would mean Spiegel would not receive excess spread from the trusts until all noteholders are paid the principal in full, according to Spiegel's filing.

In April 2002, by MBIA's count, the Spiegel private label credit card deals were breaching the three-month negative excess spread trigger, when fraud losses were reclassified as credit losses. Spiegel had argued that fraud losses should not be considered credit losses.

This Spiegel situation is remnant of other battles MBIA is fighting to protect its own shareholders and the strength of its triple-A guaranty - in effect demonstrating its ability to preempt or/and mitigate losses with a strong arm (see ASR 1/20). This instance is similar, at least from a distance, to the servicing tug-of-war associated with Union Acceptance Corp. It should be noted that investors in these MBIA wrapped transactions are not impacted - at least from a credit perspective - by these structural re-jiggerings (lest MBIA loses its triple-A).

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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