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DUFF & PHELPS: RECENT INNOVATIONS IN AUTOMOBILE LEASE-BACKED SECURITIES

 CHICAGO, Aug. 27 /PRNewswire/ --- In a recent privately placed transaction, Duff & Phelps assigned an investment grade rating to an automobile lease-backed transaction without having the originator/lessor re-title all vehicles by the closing of the transaction. This transaction is the first to be rated by Duff & Phelps without re-titling and represents an important milestone for auto manufacturers and lessors that have not employed securitization due to the cumbersome burden of re-titling.
 The underlying nature of each asset-backed transaction involves a true sale of the receivables from the seller/originator to either a trust or a special purpose vehicle. In an automobile lease-backed transaction, legal issues often arise concerning this true sale issue. Many originators/lessors retain legal title to each vehicle in order to obtain certain tax benefits. The cost and time involved to re-title each vehicle in the name of the special purpose vehicle often prevent many issuers from securitizing their portfolios. In addition, many automobile lease-backed transactions are structured so that a portion of the cash flows due to investors comes from the residual values of the underlying vehicles. A potential problem could arise if the originator/lessor were to enter bankruptcy and the vehicles were not re-titled in the name of the special purpose vehicle. In such a case, the investors in the lease-backed transaction could potentially lose cash flow that would have been attributed to the residual value payments from the underlying vehicles.
 In a recent automobile lease-backed transaction, Duff & Phelps provided workable solutions to this problem. In this transaction, as long as the originator/lessor met certain covenants and rating requirements, the vehicles could remain titled in the name of the originator/lessor. This structure allowed for a re-titling trigger event that would take place if certain covenants or rating requirements were breached by the originator/lessor. If a re-titling trigger event occurred, the trustee would immediately begin the re-titling process. Funds from the excess cash flow of the trust have been set aside to cover each vehicle's potential re-titling expense, and only the trustee has access to these funds. In addition, the trustee must act within certain time limits in order to ensure that the re-titling process is completed in a timely manner and prior to the development of any further risk. The trustee and Duff & Phelps receive monthly reports on the status of the trust and are able to monitor the covenants, rating requirements, and the status of any potential re-titling trigger event. This structure was established so that no additions to credit enhancement were needed.
 The use of a re-titling trigger event is one unique way to structure an automobile lease-backed transaction to an investment grade rating. This option may be useful for potential originators/lessors to gain access to the asset-backed market with automobile lease-backed portfolios.
 -0- 8/27/93
 /CONTACT: Laura Ladewski of Duff & Phelps Credit Rating Co., 312-368-3186/ CO: Duff & Phelps Credit Rating Co. ST: Illinois IN: AUT SU:


CK -- NY040 -- 6663 08/27/93 13:48 EDT
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Publication:PR Newswire
Date:Aug 27, 1993
Words:499
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