Two insurance policies and a backstop guaranty have been structured into the Susquehanna Bancshares auto lease transaction, to quell investor concerns over vicarious liability laws currently in effect in New York, which accounts for 66% of the Susquehanna lease portfolio. As a result, the transaction has seen healthy investor interest and is on track to price early this week at or through price guidance, syndicate sources said.
Led by Barclays Capital, the $233 million Rule 144A 2003-1 deal - just the second ever securitization for Susquehanna - offers three triple-A senior traches as well as single-A and triple-B subordinates. Subordination totals 12.5%, and there is also a 3% reserve account. Susquehanna last tapped the market in December 2000, with a $150 million deal via Credit Suisse First Boston.
Susquehanna, or any leasing company as the technical titleholder of a leased automobile, is liable for damages in just three states - Connecticut, New York and Rhode Island - for damages resulting from an accident. Repeals or liability caps are being debated in Connecticut and Rhode Island.
The benchmark for damages assessed to a leasing firm was set in Rhode Island, where a court ruled against Chase Auto Acceptance Corp. and assessed $28 million in damages. The benchmark for absurdity was set in New York, when a jury awarded $1 million in damages to a woman who successfully sued an undisclosed finance company when her father, driving his leased car, ran her over in the family driveway while she was sunbathing, according to the Alliance of Automobile Manufacturers.
Sources close to the Susquehanna deal said that while the risk of a large judgment does exist, and the potential severity could be great, the likelihood of it impacting this offering are minimal. Nicole Lawrence, an associate analyst in Moody's Investors Service auto group, noted four key events that would have to take place within the life of the deal, in order for it to have an impact. "It may eat into credit enhancement, but a single verdict would not blow up this deal," she said.
In order for this deal to be negatively impacted by a judgment, you must first have an event that leads to litigation, a judgment must find the leasing company liable, both insurers must fail to deliver payment and Susquehanna has to renege on its guaranty. "[Susquehanna leasing subsidiary] Hann Financial is required to maintain on behalf of the origination trust contingent and excess liability insurance which provides primary and/or excess coverage of at least $5 million combined single limit coverage per occurrence and an umbrella insurance policy which provides coverage up to $20 million per occurrence. Susquehanna has guaranteed to cover tortuous liability claims up to $25 million," noted Moody's pre-sale report.
"The event risk of all the protections failing is small," Moody's Lawrence said. "And should any case be on appeal for two years, as the Rhode Island case is, this transaction would be almost all paid down." The longest dated tranche in the deal is three years and over 71% of the leases in the pool are roughly three years in term.
The vicarious liability law, signed into effect in 1924, has led many auto finance companies to cease auto leasing activity in New York as of July 1, after the state legislature failed to eradicate or cap liabilities prior to its summer recess. While the state Senate passed A-1042, which would have repealed vicarious liability, the bill stalled in the state Assembly.