In what some are calling the next shoe to drop in securitization land, apparently The Spiegel Group now joins the ranks of NextCard, in that both entities have outstanding securitizations that are still revolving despite having allegedly hit early amortization triggers.

Though the circumstances are quite different, the precedent could be unnerving, sources said, as some of the basic structural tenets of securitization are apparently open for debate. As for Spiegel, the company has effectively postoned the early amortization of two of its private label credit card securitizations from the Spiegel Master Trust (SPMT 2000-A and SPMT 2001-A). On April 11, a court awarded the struggling retailer a temporary restraining order against MBIA and The Bank of New York, one day after MBIA informed Spiegel it would ask BNY (the trustee) to begin winding down the securitizations. The parties were scheduled to meet in court again on May 3 for a second hearing, although that has been postponed.

"MBIA and Spiegel have agreed to postpone the hearing on the preliminary injunction due to discussions between Spiegel and the company," said Richard Weill, vice chairman of MBIA. "MBIA expects that these discussions will lead to a satisfactory resolution of the issues."

Spiegel declined to comment beyond what was made publicly available in a press release.

Unlike the NextCard event, when the Federal Deposit Insurance Corp., as receiver, exercised its legal prerogative to freeze the early amortization, at issue with Spiegel is whether or not a trigger was actually hit. At least partially reminiscent of NextCard, MBIA is basing the trigger event on a theoretical reclassification of fraud losses to credit losses, which would result in the trusts having hit three consecutive pay periods of negative excess spread, according to the complaint filed by Spiegel's law firm, Kirkland & Ellis.

Recall that in NextCard's case, it was the reclassification of fraud losses to credit losses that brought the securitizations back onto NextBank's books, as the Office of the Comptroller of the Currency viewed the securitizations as failing non-recourse treatment qualifications (theoretically, NextBank had been subsidizing the securitizations all along, by deducting credit losses from the seller's interest).

"This is yet another test case which has broader implications for the market," said Jeff Salmon, credit card analyst in the research group at Barclays Capital. "What it really boils down to is a definitional issue."

Spiegel classifies a loss as a fraud loss if the borrower fails to make an initial payment, apparently implying that it was the borrower's intention, when opening the account, never to pay, which Spiegel argues is a fraud event.

"It's kind of a matter of semantics," commented Mark Adelson, head of structured finance research at Nomura Securities. "Some people are bad credits because they don't want' to pay. If we only focused on people's ability to pay, we wouldn't need FICO scores."

The plaintiff also argues that its fraud classification practices have not changed since the trust's inception. Spiegel Group is the parent company of several retailers, including Spiegel, Eddie Bauer, Newport News, and sells its products at retail locations, via the Internet, and through catalogs. Spiegel is also parent company to First Consumers National Bank (FCNB), the institution through which the company issues its credit cards.

The origination characteristics - such as whether the so-called fraudulent accounts were opened in-store or online - is unclear at this point. Spiegel's retail Web sites do not appear to offer online credit card originations.

The Spiegel Master Trust has shown fairly consistent three-month average excess spread in the range of 4% to 6%, meaning that the said fraud losses would have to be in the 4% area for the deals to hit the trigger. For April, Spiegel is showing charge-offs at about 18.5%, according to Fitch Ratings.

"It begs the question, If fraud loss is really that high, why is it that high?'" Salmon said. "What's going on the origination end? And should that be considered a credit issue?"

"It also raises the issue of, Who else has fraud losses that heretofore have been invisible?'" asked Nomura's Adelson.

Some larger issues

Though the debate seems important in its own right, at stake here, for one, is Spiegel's solvency, the complaint says. However, for the court to award the temporary restraining order, Spiegel had to argue that the early-am would cause irrecoverable harm to the company. If the early amortization were to begin, as much as $40 million per month would be diverted from Spiegel and distributed to the ABS bond holders, the complaint says. Further, Spiegel argues the damage of an early-am would be twofold, as the company would be "denied the liquidity afforded by the trust," in that FCNB would not be able to fund its originations. Spiegel claims these ramifications could throw it into bankruptcy, as the company is already in a "precarious financial position."

This raises some tender issues. For one, if Spiegel were to file for bankruptcy, the trusts would then clearly hit their triggers; this begs the question, would MBIA, and the bondholders in the other Spiegel/FCNB securitizations, be worse off with a potentially more severe servicer disruption? Some would argue this shouldn't be a consideration - a trigger is a trigger, so this should be strictly definitional - although the market did see MBIA weigh the pros and cons of early amortization with ANC Rental Corp., apparently deciding that keeping certain ARG Funding deals alive would better mitigate losses.

Perhaps just as significant, the bank regulators are teetering in the background of this mess, as First Consumers "is under the strict scrutiny" of the OCC. Earlier this year Spiegel announced it would try to sell its credit card operations, and was restructuring its credit facilities.

Commented a source who preferred to remain anonymous, "A real concern is that, if First Consumers went into receivership, what would happen to the trusts? Would the FDIC come in and freeze them? What's the precedent, and is MBIA considering this?"

What's the precedent seems to be the overriding theme here.

"On the one hand, a lot of the questions that were outstanding prior to NextCard will no longer be outstanding, because the market may have some precedent once the dust settles," said William Black, credit card ABS analyst at Moody's Investors Service. "The other interpretation of the events that are unfolding, is that it's raised more questions than it's answered. I would not say that NextCard is the way things will always happen. Each event will have to be treated as a unique event, but that doesn't mean that you can't learn from each one."

As for Nextcard, charge-offs in the trust showed an initial spike into the low double digits after the fraud losses were reclassified in October 2001. Charge-offs stabilized and even dropped into the high single digits in November, and were wavering in this range, spiking again in March, coinciding with the seizure of the bank by the regulators, to the 13.5% range, a historical high. Also in March, delinquencies spiked to their historical peak, in the high single digits.

At least one source believes the NextCard Master Trust is heading into negative excess spread down the line.

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