MOODY'S AFFIRMS RATINGS ON CONSECO FINANCE'S MANUFACTURED HOUSING SECURITIZATIONS
Moody's Investors Service has affirmed its ratings on the outstanding classes of Conseco Manufactured Housing Pass-Through Certificates, following the Bankruptcy Court's Interim Order dated December 20, 2002, regarding servicing of the securitizations.
The Order directs the interim amendment of the Pooling and Servicing Agreements for over 60 manufactured housing securitizations being serviced by Conseco Finance Corporation for which U.S. Bank, N.A. is serving as trustee (the "Pooling Agreements"). These amendments to the Pooling Agreements provide that, among other things, Conseco Finance retains servicing under the MH securitizations, the Servicing Fee increases to 125 basis points per annum, and the Servicing Fee allocation becomes senior to the allocation of cash receipts to certificateholders. In addition, U.S. Bank and Conseco Finance are ordered to negotiate a final agreement as to servicing matters that the court would find to be fair and reasonable to the securitization trusts and the holders of certificates issued by the trusts.
The Order was issued at the request of Conseco Finance and U.S. Bank as Trustee, and covers only securitizations involving those parties. However, Wells Fargo (the current trustee for two Conseco manufactured housing securitizations) is expressly permitted to opt-in to the interim agreement.
Moody's notes that no provisions of the Pooling Agreements expressly grant the Trustee and Conseco Finance authority to amend the allocation of proceeds, although successor servicer provisions in some of the Pooling Agreements permit a smaller increase in servicing fee and an increase in priority of payment to successor servicers other than Conseco affiliates. However, notwithstanding these contract terms, the bankruptcy court has ordered the Trustee to modify the Pooling Agreements on an interim basis based on the agreement noted above, and granted the Trustee authority to negotiate a permanent resolution with Conseco Finance addressing servicing protocol, servicer fees, and related matters.
The court seems to be applying its equitable powers to protect the servicing asset for the benefit of Conseco Finance's creditors. The motion the court approved cited the court's authority under the Bankruptcy Rules to approve compromises in the best interests of the estate, and cited the interests of certificateholders and the Trustee. The court also cites the Trust's difficulty in finding an alternative servicer - a consideration directly related to the protection of certificateholders.
Going forward, it is unknown whether certificateholders and Conseco Finance will reach a similar permanent agreement (or any permanent agreement) on servicing. Under the Pooling Agreements, any such amendments would need the consent of at least 51% of certificateholders, depending on interpretation, or potentially 100% of certificateholders. Remaining unclear is the court's intentions as to any permanent agreement reached by Conseco Finance and the Trustee - the Order mandates that certificateholders objecting to any permanent agreement appear and object at a final hearing. Following a final hearing, the court envisions issuing a final order binding upon certificateholders as to the terms of the resolution.
Moody's believes that the continuation of Conseco Finance as servicer, if it continues its present system of operation, would contribute to rating stability for the certificates, even if the annual fee remains as high as 125 basis points. Conseco's established servicing platform, staff expertise in this sector, systems capability and familiarity with the obligors places it in a unique position to service the underlying loans. If servicing were to shift, Moody's would consider whether any changes in Conseco's servicing actions, any further increase in fees, or any outright transfer of servicing would adversely impact Trust cashflows: any disruption in servicing or a hiatus could create delinquency spikes, foreclosure delays and an increased level of losses. In considering the effect of changes to servicing arrangements, Moody's would also consider any impact from the Trustee's actions and obligations in respect of the trusts, possibly including its obligation to provide for replacement servicing under specified conditions.
Moody's rating affirmation is also based on the fact that Moody's had already largely incorporated into its analysis the adverse impact of a potential shift in Servicing Fee. The risk of a Conseco Finance bankruptcy has been a real possibility for some time, and Moody's analysis contemplated a range of outcomes. In particular, even though the Pooling Agreements do not allow for a 125 basis point fee for servicing following a Conseco Finance bankruptcy, recent experience with securitization participants in other servicer bankruptcy situations led Moody's to incorporate the possibility of higher costs or fees when it took its rating actions on the deals on December 3, 2002. This contingency was considered even though the Pooling Agreement provides for the Trustee to assume responsibility for servicing following a Conseco Finance bankruptcy or failure to perform.
Moody's affirmation also considers the limited scope of the Bankruptcy Court's actions to date. Thus far, bankruptcy-remoteness issues such as recharacterizing true sale or equitable consolidation do not appear to be at issue. In its order, the court in fact explicitly noted that Conseco Finance acknowledged that the proceeds of each securitization trust are the property of that trust. Moreover, the court suggests that any permanent modifications to the pooling agreements would have to at least consider the views of certificateholders at a hearing.
Nevertheless, the Trustee's ability to administer the provisions with respect to servicing the trusts' assets in the certificateholders' best interests is constrained due to Conseco Finance's bankruptcy. As a debtor-in-bankruptcy, Conseco Finance has the right to seek to reject or assume the Pooling Agreements, which are executory contracts. The Pooling Agreement provisions that make Conseco Finance's bankruptcy a servicer termination event would likely be unenforceable in any event under federal bankruptcy law. The inability of the Trustee to unilaterally replace Conseco Finance as servicer thus limits the Trustee's options for finding suitable servicing that were contemplated within the Pooling Agreement provisions, creating a situation potentially adverse to certificateholders.
Conseco Finance Corp., a wholly owned subsidiary of Conseco, Inc., is headquartered in St. Paul, Minnesota. The company is the largest servicer of manufactured housing contracts in the United States with a servicing portfolio of approximately $23 billion in receivables as of September 30, 2002.
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