IFR International - 21.07.2018

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Harley Marine’s ABS rattled

by battle

ASSET-BACKED SECURITIES Spreads sent dramatically wider

A battle for control over HARLEY MARINE SERVICES

has sent spreads dramatically wider on the

tug and barge company’s only asset-backed

securitisation, but ratings agency KBRA said

there is no evidence of increased credit risk.

Spreads on the US$455m bond, BARGE 2018-

1 , which was issued in early May, widened from

90bp to as much as 310bp on subordinate

tranches, since a legal battle surfaced earlier this

month that included embezzlement allegations

and a fight for company control.

The BBB-rated US$405m 3.8-year tranche

recently widened to swaps plus 334bp, having

traded as tight as 245bp in late June, according

to KBRA, which used TRACE data. It priced at a

yield of 5.75% and spread of 284bp in early May.

The widening in the BB-rated US$50m

two-year tranche has been more pronounced.

Spreads blew out to as wide as plus 703bp,

having traded as tight as 394bp, KBRA said. It

priced with a 8% yield and spread of 522bp.

“This is going to be an ongoing court battle. At

this point, there is nothing to indicate a change

in credit risk in the transaction,” KBRA analyst

Brian Ford to IFR.

The two courts are expected to get together

to determine which court will handle the matter,

Ford said.

Minority owner MACQUARIE MARINE SERVICES

on July 2 filed a lawsuit in Delaware Chancellery

Court, seeking damages from Harley Franco,

Harley Marine’s Chairman and chief executive.

An audit allegedly found Franco

misappropriated over US$3.6m of the company’s

assets and funds to pay personal expenses.

The suit also sought to remove Franco from his

position, KBRA said.

Franco fired back with a lawsuit in Washington

State Superior Court, alleging a breach of

fiduciary duty by Macquarie based on its alleged

attempts to oust Franco as CEO.

Subsequent court filings also show a tussle

between Franco and several Harley Marine

board members over Franco’s removal as

CEO, according to KRBA, which sourced this

information to court filings, Law360 and the

Seattle Times.

Franco won a temporary restraining order that

reinstated him as CEO and ordered his access to

the company to be restored.

“It’s unusual to see allegations like this,” Ford

told IFR. “To the best of my knowledge this has

not occurred in any post-crisis WBS.”

The barge company, meanwhile, is operating

as usual and the last servicer report shows a

robust amount of securitisation cash flow. The

deal’s interest coverage was at 2.44x in June,

well above the 1.75x that would trigger a partial

amortisation event, according to KBRA.

The deal is different to more mainstream

restaurant franchise whole business

securitisations, where future franchises can be

pledged as assets.

With the Harley Marine deal, the same 122

vessels are the only cash-generating assets

pledged to the securitisation for the life of the

deal.

Companies like Harley Marine have turned

to the securitisation market in recent years

because the sector’s tighter spreads have made

the securities a cheaper source of financing than

high-yield bonds and leveraged loans.

WBS issuance soared to a post financial crisis

high last year with 10 issuers raising US$7.961bn,

according to IFR data.

KBRA said negative headlines and a change in

management could cause some clients to cancel

their contracts with Harley Marine or employees

to leave the company - a scenario that might

impact future cashflows.

But it sees that as unlikely for now.

“We are closely monitoring the situation and

will release additional information as it becomes

available,” Ford said.

Guggenheim was the bookrunner on the

Harley Marine WBS sale. KBRA was the only

agency to rate the trade.

Natalie Harrison, Joy Wiltermuth