The acquisition of Duff and Phelps Credit Rating Co. by Fitch IBCA left a few subprime issuers worried, as the merger impacted a net interest margin (NIM) structure that has typically been rated by DCR.
Along with a $425 million public home-equity transaction scheduled to close this week, WMC Mortgage is privately placing a NIM structured security piece rated by Fitch instead of Duff & Phelps.
Duff & Phelps rated the double-B NIM piece in WMC's most recent transaction, which priced last September.
So does the merger really affect transactions going forward, or does Fitch adequately appease the crowd?
"The answer there is maybe," said Todd Wallace, executive vice president in secondary trading at WMC. "It's hard to ascertain. Clearly once the news came that Fitch was buying Duff, we pulled the transaction. We were set to go that week."
The early indications were that the deal would have gotten better net cash execution from the Duff scenario, Wallace said.
"However, we just don't know," he added. "The transaction isn't as attractive as it originally was. But we are very interested in working more closely with Duff and Fitch to understand how we make these types of transactions provide better execution for issuer."
The NIMs structure, though not new, is almost always used in private transactions, so it's rarely reported on. It resembles the new Turbo-B structure, which was discussed in a report issued last week by Moody's Investors Service.
Both structures monazite excess spread and residuals to produce a cash flow into a subordinate piece of the deal, which shortens the life, eliminates a certain amount of risk, improves the rating, and makes the transaction more attractive to investors.
In the NIMs structure, the prepayment penalty is also captured and flowed into the subordinate piece with the purpose of advancing the cash flow.
WMC's public deal, which is scheduled to close on Wednesday, is structured in four parts: a $335 million A-class, rated Aaa/AAA (Moody's/Fitch); a $34 million M1-class, rated Aa2/AA; a $20.187 million M2-class, rated A2/A; and a $20.187 million B-class, rated Baa2/BBB.
Bear, Stearns & Co. is managing the transaction.