One of the most problematic deals ever to hit the European market took yet another downturn last week. Italian media group Cecchi Gori's L465 million ($231 million) transaction, called Finance for an Italian Library of Movies (Films), has finally had its BBB-minus rating withdrawn by Fitch, following the consistent failure of the company to provide the ratings agency with timely and accurate performance information.

The Films deal, arranged by Merrill Lynch, came to market in February 1998 and is backed by revenues from Cecchi Gori's own film library. For the first eighteen months, it seemed that the transaction was performing to expectations, but in November 1999 it became apparent that the company had missed two rental payments to the SPV. On top of that, the overcollateralization level required as credit support by Fitch had fallen below the stipulated 1.56%.

As a result of those problems, Fitch downgraded the deal from A-minus to BBB-minus in January this year, and bondholders held a meeting with the deal's trustees, Bankers Trustees, to decide whether to seize the film library or allow the deal to continue.

In the end, it was agreed to take the latter option, but the latest development now brings into question if the bondholders would now rather sell the underlying assets to recover their investment than allow the deal to go into default.

Fitch tried to resolve the situation in September when it met Cecchi Gori representatives to discuss the continuing poor performance and the lack of sufficient information. Following the meeting, Fitch gave the company a one-month ultimatum to improve matters but Cecchi failed to respond and Fitch decided on its final course of action.

"It is Fitch's opinion that the parties involved in this transaction (following numerous requests) have failed to provide timely or accurate information," Fitch said in a statement. "In light of the above, Fitch believes its ability to provide service to the investment community in regards to the Films transaction has been compromised and is no longer consistent with the existence of a public credit rating by Fitch."

Although in principal, a deal does not need the official backing of a rating agency to perform, the situation with Films now is that the investors have no protection with regards to credit protection levels or trying to insure timely payment. It is certain that bondholders will be in constant discussions on what to do next, and that decision could mean the final curtain for Films.

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