Sector developments and company hires

‘Flip clause’ complaint dismissed
The US Court of Appeals for the Second Circuit has ruled that investors should keep roughly US$1bn received from various Lehman Brothers affiliates after the bank’s 2008 bankruptcy filing triggered the liquidation of dozens of CDOs. The case centres on the Bankruptcy Code’s treatment of ‘flip clauses’ in a securitisation waterfall, which reprioritise cashflow upon bankruptcy and often are included in securitisations that include swaps (SCI passim).

The Second Circuit’s ruling held that, even assuming the flip clauses in Lehman’s CDS were ipso facto clauses that modified the rights of the Lehman affiliates upon the filing of a bankruptcy case, they were still enforceable because Section 560 of the Bankruptcy Code exempted the swap agreements and their flip clauses from the Code’s general prohibitions on ipso facto clauses. The Second Circuit therefore affirmed the district court order dismissing Lehman’s complaint in its entirety. Lehman will have 90 days from entry of judgement to seek certiorari from the Supreme Court.  

In other news…

Aircraft ABS hit by novation failure
Fitch has downgraded the class A, B and C notes issued by Lunar Aircraft 2020-1 and assigned all classes a negative rating outlook, while removing the rating watch negative placement. The rating action reflects the termination of purchase agreements to novate six aircraft in the pool prior to the delivery expiry date of 23 November 2020 and the resulting higher concentration risks, with less diversification from an aircraft, airline lessee and regional exposure perspective compared with closing. Four aircraft remaining in the pool have leases maturing in the next 12 months and, were they to be sold, would result in further elevated concentration risks with just eight aircraft left in the pool at that point.

The actions incorporate the ongoing deterioration of all airline lessee credits backing the leases in the pool, downward pressure on certain aircraft values, Fitch's updated assumptions and stresses, and resulting impairments to modelled cashflows and coverage levels. On 30 July, a notice confirmed the redemption of the aircraft and stated that the applicable amount attributable to each undelivered aircraft will be used to prepay the notes without premium.

CDO administrator resigns over owed expenses
MaplesFS has advised Crystal River CDO 2005-1 noteholders that it intends to terminate the provision of all services to the issuer - including resignation of the directors and registered office - by initiating the termination clause of the administration agreement. The firm notes that for several years, it - and various other service providers to the issuer - have not been paid for their services. The trustee has advised that the current aggregate of unpaid administrative expenses to service providers exceeds US$1m (Maples outstanding fees are currently approximately US$40,000) and that there are insufficient proceeds to pay these administrative expenses.

Various other service providers have already ceased providing services to the issuer. In due course, unless successors are appointed, the Registrar of Companies will cause the issuer to be struck off from the register of companies in the Cayman Islands, whereupon the issuer will cease to exist.

Noteholders should contact Maples or the trustee if they wish to make payment arrangements in respect of these unpaid administrative expenses. 

North America
Bill Berliner has joined PennyMac as md, responsible for managing the company's research and fixed income investor relations efforts. He was previously director of analytics at Mortgage Capital Trading and has also worked at Kinecta Federal Credit Union, Manhattan Capital Markets, Countrywide Capital Markets and Bear Stearns.

Toorak Capital Partners has expanded its asset management team with the hires of Kevin Tatro as head of asset management and reporting and Stephen Tyde as head of special servicing. Tatro most recently served as principal and head of asset management at Woodbridge Investments and has held leadership positions at Macquarie Group, Doral Group, LBBW and JPMorgan Investment Management. Tyde previously served as a director with Rialto Capital Advisors and has also held leadership positions at DLP Real Estate Capital, Pulte Homes, Beazer Homes and Levitt & Sons. Earlier in his career, he was an attorney specialising in real estate and commercial litigation, land use, zoning and bankruptcy.

QM overlap mooted
The Structured Finance Association has submitted a comment letter to the CFPB agreeing with its proposal to delay the scheduled expiration of the GSE’s qualified mortgage ‘patch’ until the new proposed General Qualified Mortgage Rule is in place (SCI 23 June). Additionally, the association recommended an overlap period of six months between the current rule and any new rule, in order to allow for a smooth transition that does not disrupt access to credit.

STACR notes downgraded
Moody's has downgraded from Aaa to Aa2 the class M2, M2F, M12 and M2I notes issued by STACR 2014-DN1. The rating action reflects an increase in projected credit events driven by a rise in Covid-19 related delinquencies and forbearance. As of July, 4.17% of the reference pool is delinquent.

Moody’s notes that most fixed severity CRT transactions issued by Freddie Mac provide a grace period for delinquent loans that are affected by a natural disaster. However, the affected transaction does not have a natural disaster exception and loans will be recognised as credit event reference obligations when the loans become 180 days or more delinquent.

UKML to undertake strategic review
Since unanimously rejecting M&G Investment Management’s (MAGIM) cash offer for the company (SCI 20 July), UK Mortgages says it has consulted extensively with shareholders to seek perspectives on the offer, as well as its strategy and prospects. While the UK Mortgages board still believes that the terms of the MAGIM offer materially undervalue the company and its prospects, it has committed to commencing a review of future strategy once it is no longer in an offer period under the Takeover Code, with the aim of maximising the value created for shareholders from the company’s portfolio, enhancing liquidity and removing the discount at which its shares trade versus the NAV.

It is anticipated that the review will include: the optimisation of assets to release further funds; the gradual sale of assets to release further capital; the reconstruction of the company to facilitate its ongoing growth; and the orderly winding down of the company. The board would seek to conclude the review within a few months of the end of the offer period, which is due on 17 August.