NEW YORK, Aug 7 (IFR) - In a bid to rescue itself from the
brink of bankruptcy, consumer lender Springleaf Financial last
week issued its third and largest subprime residential
mortgage-backed security (RMBS) within a year, hoping that the
proceeds will help pay down $2 billion of maturing debt coming
due by year end.
In fact, the $970 million transaction is the largest
post-crisis RMBS of any kind. Besides Springleaf, only Redwood
Trust, a REIT, and Credit Suisse have issued post-crisis
non-agency RMBS deals.
Securitization may be the last weapon left in the
90-year-old company's arsenal to solve its burgeoning operating,
funding, and liquidity challenges.
Springleaf faces funding pressure, and possible bankruptcy,
if it doesn't continue to securitize its legacy mortgage loans.
Given the company's low unsecured corporate rating -- S&P
lowered its credit rating to CCC from B this past February --
issuing corporate debt is no longer a cost-effective option.
"We believe that should its funding or securitization
options become unavailable, the company will not have enough
liquidity to survive 2012, and in that case a distressed debt
exchange would be likely," S&P analysts wrote at the time.
Despite some recent non real estate-related originations,
the company's largest portfolio exposure continues to be the
troubled housing market, and pretax losses are expected
throughout 2012, S&P said.
In fact, Springleaf hired a restructuring firm earlier this
year to help it survive, and securitization continues to be its
primary funding option.
Luckily, the opportunity for more deals still exists: Less
than 40% of the $11 billion book of mortgages on its balance
sheet has been securitized, meaning Springleaf is hoping to
become a programmatic RMBS issuer in order to raise funds to pay
off and/or refinance its debt, according to people familiar with
the company's plans.
The company has succeeded so far in making investors
comfortable with its three post-crisis mortgage bonds, which
were all issued after Fortress took ownership.
Investors say that the mortgage collateral underpinning the
offerings is mostly clean -- the majority of borrowers provided
full documentation, the loans are largely fixed-rate, and the
underlying properties are owner-occupied.
Moreover, in an attempt to mitigate investors' misgivings
about subprime mortgage debt and create a "benchmark" Springleaf
mortgage bond, the company has tried to make the pools of
mortgages underlying each deal as similar as possible --
typically a mixture of subprime and Alt-A collateral whose
borrowers have been current for at least 18 months.
That way, investors know what to expect and can trust the
performance of the product.
But the key to selling a large chunk of the bonds to a wide
swath of traditional money managers and insurance companies has
been Standard & Poor's coveted AAA rating on the most senior
Another selling point: Springleaf itself has retained the
most junior, or riskiest, portions of each transaction; in last
week's deal, for instance, the firm retained the bottom 20% of
the offering -- so-called subordinate notes -- which shows
investors that the issuer has "skin in the game."
RETURN OF THE SUBPRIME AAA
The embattled company, formerly known as American General
Finance, is owned 80% by Fortress Investment Group and
20% by AIG. It was spun off from a unit of AIG in
November 2010, though AIG still retains a minority ownership.
This past March, Evansville, Ind.-based Springleaf disclosed
that it planned to close 150 branch offices in 25 states, after
taking a loss of $244 million in 2011 and posting a $48 million
operating loss in the first quarter of 2012, according to SEC
It also ceased mortgage lending in January, though it still
continues its consumer-loans business, including personal
lending for home improvement, college expenses and bill
A spokesman for Springleaf declined to comment.
Last week's RMBS, comprising both Alt-A and subprime legacy
mortgage loans -- mostly issued prior to 2007 -- featured a AAA
slice with a thick 45.1% layer of so-called credit enhancement,
or the credit buffer protecting investors in the most senior
The four mezzanine notes (all sold to investors) and
subordinate tranches were pre-placed by underwriters Bank of
America Merrill Lynch (structuring lead) and RBS.
S&P was the sole rater on the deal, which featured
collateral that had only 80% full documentation from borrowers
-- a decrease from the 100% documentation in Springleaf's first
post-crisis subprime deal, which priced nearly a year ago.
The credit enhancement on the current trade decreased too,
from 51.15% in last year's deal to 45.1% for last week's
transaction. A second offering, the $413.5 million SLFMT
2012-1, priced this past April with 45% credit enhancement
protecting the AAAs.
Despite the risks, investors of all stripes snapped up the
bonds of last week's deal (SLFMT 2012-2), leading to the AAA
bond pricing at Swaps plus 175bp and a yield of 2.157%, which
was the tight end of price guidance. For comparison, the April
deal's AAA bond priced at +200bp and a yield of 2.585%.
The AAA rating attracted traditional money managers and
funds in a fairly broad distribution, but the yield was not
robust enough for some market participants.
"It is reasonably attractive collateral, but given that we
are not as ratings-constrained as some investors, it's not an
attractive yield for us," said Jason Callan, the head of
structured-products investing at Columbia Asset Management.
"The rating agencies tend to look at seasoning and payment
history, but we are most concerned with yield, structure, and
average life. We see better opportunities in the secondary
market, where volumes are up and there is lots of liquidity and
growth," Callan said.
S&P COVERS ITS BASES
In a sharp turnaround from the relative lack of transparency
offered by S&P for RMBS deals issued during the 2005-2007
structured finance boom, the rating agency did not take its
latest subprime mortgage AAA rating lightly; its lengthy
pre-sale report for the current Springleaf deal left no stone
The analysis included: a third-party due diligence review on
the loans from an outside party, AMC; a mortgage-originator
review; a representations and warranties review; a servicer
ranking; a legal review; a financial-strength review for the
issuer; and an anti-predatory lending review, just to name a few
of the assessments.
Times have changed. During the peak pre-crisis years, the
cookie-cutter, torrid pace of RMBS deals -- and the apparent
lack of RMBS staff at S&P, according to congressional findings
on the crisis -- meant that RMBS was the only structured finance
asset class for which S&P did not publish any pre-sale reports
whatsoever. There were just too many deals.
Interestingly, investors reported that because a small
percentage of the loans in the current Springleaf deal were
flagged under US abusive-lending laws, several underwriters
turned down co-manager assignments because of potential
While roughly 3% of the deal's loans were deemed "high-cost"
and are compliant with the US Home Ownership and Equity
Protection Act (HOEPA), which was designed to protect borrowers
from high-fee predatory mortgage loans, S&P said that in a
measure of caution, it demanded increased credit enhancement, or
investor protection, for this reason.
"The weighted average loss severity for these (390) loans,
at each rating category, is approximately 200%," S&P said. "In
accordance with our anti-predatory lending law criteriawe
calculated additional credit enhancement"
"This does give pause to underwriters," said one banker away
from the deal. "Some banks don't want the liability. The
high-cost nature of the underlying loans -- even a small
percentage of them -- means that the trust can be sued."
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