German CLOs tied to bankrupt company

Published May 29, 2006 12:00 AM EDT 2 Min Read

Several German SME CLOs stand to be affected by the bankruptcy filing of German soft toy and gift manufacturer Nici AG. The company applied for insolvency protection on May 16, with fraud suspected as the reason for its collapse.

The deals with exposure to the company name are PREPS 2004-2, 2005-1 – jointly originated by the Capital Efficiency Group and HypoVereinsbank – and Commerzbank’s CB MezzCAP. According to market reports, three PREPS portfolios had exposure to the Nici name confirmed at 10 million ($12.7 million). CB MezzCAP is believed to have a similarly sized exposure to the insolvent company as well. However, Commerzbank had not confirmed this at press time.

“Two factors exacerbate the effect of the defaults; firstly, the portfolios in these deals are fairly lumpy with a small number of obligors, and secondly, the exposure is through a Profit Participation Agreement, which is a hybrid between debt and equity and its deeply subordinated nature means we can assume recoveries of close to 0%,” Dresdner Kleinwort Wasserstein analysts explained.

The PREPS deals have more substantial first loss protection, which is coupled with the benefits of structural de-leverage due to amortization. Thus the effect of the Nici default is expected to be relatively minimal. The CB MezzCAP deal is another story – the exposure in this transaction’s portfolio is enough to wipe out the equity and potentially pose the risk of a principal write-down on the Class E, double-B rated bonds. Last week Standard & Poor’s put the junior notes of CB MezzCAP on negative watch. Meanwhile, Fitch Ratings – who did not rate the Commezbank deal – affirmed the ratings of the two PREPS deals.

It is likely that other deals will have exposure to the Nici brand but it would have less of a negative impact because of the granularity in these other portfolios. Many of these deals also benefit from some seasoning and a solid performance history, reported Dresdner.

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