RFC/Conti: ABS Alive, but Merger Questioned


It's business as usual for Residential Funding Corp. and ContiFinancial in terms of financing at least. Both firms will securitize $2.5 billion in mortgage collateral before the end of the quarter after recently announcing merger talks. But some market watchers are skeptical that the union will occur.

RFC will bring $1.1 billion of subprime home equity debt to market in the next two weeks via Prudential, and Conti has readied over $1 billion in home equity ABS to land before June.

The subprime paper from RFC will be split evenly between fixed- and floating-rate paper, said a source close to the situation, and the firm's long-time monoline partner Ambac looks to provide a wrap, as ABS spreads have gotten a little soft lately.

"Obviously, a wrapped deal is the best economics right now," the source said. "We always look at a couple different structures, but a wrap like a wrap hybrid is more likely."

No underwriters have been lined up for RFC's 125 LTV deal, but Ambac should provide credit enhancement on the firm's planned $415 million offering. Officials at the firm refused comment about merger discussions.

Conti has readied one, "possibly two deals," totaling over $1 billion that should hit the market before the end of the quarter, the source said.

"There's no change in the way we're doing our business," said a person close to the firm, who offered nothing further concerning the merger negotiations.

A corporate downgrade of Conti by Moody's and Standard & Poors, which came a day after Conti announced in a press release that RFC was considering an ownership stake in the firm, has made some experts skeptical of the seriousness of the merger discussions.

"The timing of the downgrade suggested to me that Conti knew about the downgrade in advance, because Moody's usually tells you when you're going to be downgraded," said an analyst. "I think Conti begged [RFC] to put out a press release saying that they're in negotiations so that the bonds wouldn't deteriorate in price."

Moody's downgraded ContiFinancial's senior unsecured debt rating to Caa1 from B1, and Standard & Poor's said it placed the company's credit and debt ratings on its CreditWatch list. After initial tightening following the news, Conti paper widened, said the source.

"I think the bond market doesn't really believe that the deal is going through in the form that the equity market initially though it might," the source added. The firm's stock fell from $10 to $6 after its corporate debt was downgraded. At press time, it closed at $7.

Conti sustained big wounds from the flight to quality that occurred in the third and fourth quarters of 1998. Formerly a subprime home equity powerhouse, the firm found a lack of investor interest and spread widening on the consumer debt it often sold in the asset-backed market. The dip in the sector contributed to a dismal yearend, and caused the company to sustain a $59 million fourth quarter loss and forced it to slash staff considerably.

The merger talk follows a number of match-ups between deep-pocketed parents and capital-hungry, subprime firms including Washington Mutual, Inc. and Long Beach Financial Corp.; and Goldman Sachs' and Southern Pacific's U.S. business. - SK