SFIG Comment on USD94 million Trustee Holdback

SFIG has issued a thoughtful comment on the controversy related to the $94 million holdback from investors by trustees of certain RMBS deals. While withholding comment on the specifics of the case, SFIG flags several important issues for the market that have been raised by investors. In particular, “What is the basis under the relevant documentation for the withholding of cash:

• While Pooling and Servicing Agreements generally indemnify Trustees against loss, liability or expense, there is a carve-out if there is a breach of contract, gross negligence and willful malfeasance. Where a trustee is being sued and the allegations include breach of contract and negligence on any deals in question, can they withhold funds?
• On the other hand, Pooling and Servicing Agreements generally indemnify the Trustee for “reimbursement” of costs, losses, and liabilities. On the basis that the withheld funds include reserves against future costs, is it appropriate that this be classified as reimbursement, and therefore allowed under the transaction documents?
• To the extent a transaction document provides for indemnification of litigation expenses, what is the best means of ensuring that sufficient indemnity funds are available following a transaction’s termination?
• Specifically, in the case of a clean up call, the issued securities are required generally to be redeemed at a value that reflects stated principal balance. The withholding of the reserve causes a reduction against that value, so is this approach contemplated under the transaction documents?
• What is the basis of the calculation of the reserve amount and, without knowing that basis, how can a stakeholder assess the reasonableness of the calculation? 
• What is the expectation for return of funds both in terms of mechanism of return and timing? 
• How does the amount of any reserve compare to rating agency assumptions and what impact does the action have for credit ratings? 
• If a Trustee has such a right and can act unilaterally regarding these specific transactions, should it be assumed they, and indeed other trustees, may act similarly and such actions may affect other transactions and, if so, what does that mean for potential shortfalls and ratings actions for other transactions? 
• Is the potential for such actions limited to legacy RMBS transactions, or do they extend across more recent RMBS transactions or other ABS asset classes?”

SFIG goes on to recommend more openness, better transparency, and adoption of the SFIG RMBS 3.0 recommendations. We at DealVector could not agree more, and we are especially believers in the market-healing power of better bondholder communications. Well done, SFIG, in highlighting the specific documentary issues raised by this controversy.