FRONT STORY RMBS
RMAC tender raises doubts over SPVs
Hostile investor targets Fortress business
Credit fund CLIFDEN’s daring attempt to take
hold of £2bn of bonds serviced by private
equity group FORTRESS has triggered intense
speculation over its motivation but an
unprecedented tender offer could have far-
reaching implications for securitisation
laying bare how special purpose vehicles
run.
The bonds are RMAC securitisations
originated by GMAC UK, which was bought
by Fortress in 2010 and transformed into
asset management company Paratus.
#LIFDENûSAYSûITûANDûITSûAFlLIATESûHAVEûSTAKESû
in many RMAC bonds and it wants to buy out
minority holders through the tender.
One of the questions raised by the
potential move is whether an SPV is required
to sell its remaining assets back to the
originator, and not to a third party, in the
event of a call.
“Everyone has always had the concept
that the assets just go back to the originator,
but in fact, that’s probably not written in
stone anywhere,” said one securitisation
banker.
Even experienced securitisation lawyers
SAYûTHEREûISûINSUFlCIENTûCLARITYûABOUTûWHATûAû
hostile investor – to the originator or
servicer – could be allowed to do if it controls
voting rights in a securitisation.
Deal documentation usually says that as
long as the conditions for a call are met, the
SPV can redeem the notes if it has enough
funds to repay outstanding principal. It is
assumed it will get those funds from the
originator, which pays the SPV in order to
buy back the outstanding portfolio.
But this is not explicitly stated. To ensure
deals are bankruptcy remote, lawyers are
reluctant to include formal links to
originators in the documentation.
This opens the possibility that a third
party could offer to buy the outstanding
portfolio once a deal is callable, or even try
to outbid the originator.
“Is the trustee supposed to sell the
mortgages through auction?” asked a trader.
“Can anyone show up and bid? Is the trustee
DOINGûITSûlDUCIARYûDUTYûTOûNOTEHOLDERSû;BYû
selling to the highest bidder]? It is not clear
who has the rights to the mortgages.”
One lawyer said: “Even if you become a
100% noteholder that does not give you
control of the underlying, you are simply a
lender and if your debt is repaid you get the
debt back, not the underlying.”
Still, owning a controlling stake in all classes
of a deal allows an investor to pass resolutions
changing terms and conditions of the notes.
In theory, it could be possible to bring
forward the mandatory repayment date and
if the issuer does not repay it would be in
default, at which point bondholders have
more options open to them such as replacing
a servicer or administrator.
For the RMAC deals this would mean that
Paratus, which is administrator and servicer,
would lose effective control of the deals and
the associated fees.A major hurdle would be the number of
signatures required to make these changes -
lawyers list the issuer, security trustee and
other secured creditors as parties whose
approval could be required on a range of
DOCUMENTSûFROMûTRUSTûDEEDS ûMASTERûDElNITIONû
schedules and servicing agreements.
“I think there is a possibility that majority
noteholders may be able to vote for changes to
the documents although whether this would be
enforceable is not clear,” another lawyer said.
“They are valuable mortgages so it’s not a
surprise that someone wants to get their
hands on them,” said the trader. “More
perplexing is the mechanism you use to
actually get them.”STORM THE FORTRESS
h7HOûWOULDûWANTûTOûPICKûAûlGHTûWITHû
Fortress?” asked one hedge fund investor.
#LIFDENûSAYSûITûHASûAûhMAJORûlNANCIALû
INSTITUTIONvûREADYûTOûPROVIDEûlNANCINGûFORû
the tender but declined to say who it is.It also has former securitisation banker
and one-time Clifford Chance partner Robert
Palache listed on its website as an advisor.
0ALACHEûLEFTûTHEûLAWûlRMûTOûBECOMEûANû
investment banker in 1998. Palache declined
to comment.
There are two series of legacy RMBS
involved, the RMAC and the RMACS series,
both backed by UK non-conforming
mortgages. The former are callable because
they have reached dated calls and have pool
factors below the 10% clean-up call. The
latter have no dated calls and their pool
factors are above 10%.
On December 20, Paratus surprised the
market by announcing it was in preliminary
discussions about calling the RMAC series
but gave no further information.
Some market participants suggest that
Paratus may have got wind of bonds being
bought in the secondary market and so
mOATEDûTHEûPOSSIBILITYûOFûAûCALLûINûORDERûTOû
discourage investors from selling. In that
scenario, the Clifden tender offer is an
attempt to call Paratus’s bluff.
The tender prices for the callable deals
were all higher than market levels. They are
between 101 and 103 for the callable RMAC
deals and 92 to 98 for the others. There is an
additional 1% premium for early tenders
received by January 26. The tender
expiration is March 7 and settlement is
March 12.
The bonds have been trading higher in the
secondary market. The bonds that are not
callable have traded close to their respective
tender prices, but those that can be called
have traded close to par, indicating the
market believes they will probably be called
and will not be accepted for tender.
“I don’t think the tender will come to
anything,” said an investor. “So many things
don’t add up. Why pay above par for bonds
you’re going to call at par?”
But he said that if Clifden does manage to
take the deals and their assets there could be
half a dozen similar moves on other legacy
RMBS this year such as from Paragon.
“You would need someone to lend to you
and Paragon would hit the roof, so you’d
need a bank that doesn’t care about what
Paragon thinks,” he said.
Christopher MooreBONDS
SSAR 25 Corporates 28 FIG 32 Covered Bonds 37 High-Yield 40 Structured Finance 42“Is the trustee supposed to
sell the mortgages through
auction? Can anyone show up
and bid? Is the trustee doing
its fiduciary duty to noteholders
[by selling to the highest
bidder]? It is not clear who has
the rights to the mortgages”