Rep & Warranty Discussion Gets Real with JP Morgan Deal

A relatively weak framework of representations and warranties in a $616-million residential mortgage-backed security (RMBS) from JP Morgan injected fresh fuel into a discussion that’s been running for several weeks.

Rating agencies, again, grabbed the opportunity to talk tough.

Moody’s Investors Service, for one, couldn’t resist weighing in. In an unsolicited — and we can assume from the issuer’s perspective, unwelcome — opinion, the agency basically said that the deal was not triple-A material.

A JP Morgan spokesperson did not return a request for comment as of press time.
Moody’s cited the weak R&W and a “restrictive enforcement mechanism” as tipping the deal away from triple-A terrain. Also hurting its creditworthiness was the decision to have neither JP Morgan nor any of its affiliates retain any of the credit risk.

“These factors combine to create a lack of alignment between the originators and investors in the transaction,” Moody’s said.

In this post-crisis, regulatory-wary world, no arranger wants to hear that his deal is poorly aligned.
Moody’s made sure to point out the JP Morgan transaction could get a very very good rating — something between ‘Aa1 (sf)’ and ‘Aa3 (sf)’ — provided that the deal go through a rigorous review from a third-party before the close. It does, after all, have some salient strengths, not least being high quality loans with low LTVs and impressive credit scores for the borrowers.

Still, the R&W framework was not up to snuff and for a number of reasons. Among them, in Moody’s view: Issuers JP Morgan and First Republic Bank could avoid buying back defective loans; the bar for breaching R&W is set higher than in pre-crisis RMBS; and some key R&W would expire, including all of the ones covering originator fraud.

Fellow rating agency Dominion Bond Rating Service also voiced its R&W concerns in late March but unlike its rival coyly stayed away from mentioning the JP Morgan deal. In a report, the firm said that it had declined to rate two RMBS deals this year because of their weak R&W frameworks. The firm however did rate a private-label RMBS from Everbank last month.

The JP Morgan deal garnered triple-A ratings for its two senior tranches — one $244 million, the other $326 million — from Fitch Ratings and Kroll Bond Ratings, even though both agencies conceded that the R&W framework was “weak.” For them, the deal had enough extra credit enhancement to earn it the top score.

Franchise This

March maintained the fairly brisk issuance rhythm for different sectors in 2013. One of the more interesting deals was an esoteric from CKE Restaurants, the parent company of Carl’s Jr. and Hardee’s.

In late March, the issuer sold $1.05 billion of bonds backed by franchise royalty and license payments, according to a person familiar with the situation. Barclays was the underwriter.
Rated ‘BBB-’ by Standard & Poor’s, the transaction consists of a single tranche with a weighted average life of 6.6 years. The notes priced at 4.5%, wide of initial price talk that ranged from 4.0%-4.25%.

CKE owns or franchises 3,318 locations in 42 states and 28 foreign countries and US territories worldwide. Apollo Global Management took the company private in a 2010 buyout. Last year the equity firm filed to go public with CKE but later pulled the offering.

Such whole business securitizations are often used by private equity firms to refinance the debt of highly leveraged portfolio companies.

CKE is rated ‘B2’ by Moody’s and  ‘B-’ by S&P. It has around $855 million of long-term rated debt, including a $100 million first-lien senior secured revolving line of credit due in 2015, $532 million of second-lien senior secured notes due in 2018, and $233 million of senior unsecured payment-in-kind toggle notes due in 2016, according to Moody’s.

Single Assets Still Setting CMBS Tone

Meanwhile, a $710 million single-asset commercial mortgage-backed deal helped keep the deal flow going in that asset class.

In late March, Deutsche Bank and Bank of America Merrill Lynch priced the $710 million of notes backed by the fee interest in Worldwide Plaza, a 47-story office tower located at 825 Eighth Avenue in New York City.

The single asset CMBS deal, COMM 2013-WWP was rated by Morningstar and S&P. The deal priced its $60 million, 7.58-year, ‘AAA’ notes at 90 basis points over swaps with a coupon of 2.9%; and the $284 million, 9.94-year, ‘AAA’ notes priced at 110 basis points over with a coupon of 3.42%.