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 slices.
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.”
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 filings.
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 consolidation.
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 bonds.
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.
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 unturned.
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 reputational risk.
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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