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Players Clash Over Failing UK Transaction
Asset Backed Alert, Harrison Scott Publications Inc. (May 7, 2004)

The issuer of a 1997 securitization of U.K. highway service-center revenues appears to be driving the deal into bankruptcy in order to reduce the sum it's obligated to pay subordinate bondholders.

Welcome Break Group said last month that there isn't enough money in the trust to make quarterly interest and principal payments that are due to investors on June 1. Under the covenants of the 376 million British pound ($674.1 million) transaction, securitization trustee Deutsche Bank will then have to appoint new receivers for the issuing entity, Welcome Break Finance.

If that happens, the subordinate noteholders - including London hedge fund Sisu Capital - will lose their voting rights. And that, according to the market buzz, is the precise goal of Welcome Break Group's owner, Bahrain-based private-equity firm Investcorp.

The official line is that the receivables available to pay off bond-holders falls 41 million pounds short of the amount needed. But word has it that Investcorp, which calls the shots at Welcome Break, is actually trying to force an early-amortization process under which Sisu wouldn't recover the full amount of principal it is owed. It's believed Sisu owns up to 33.5 million pounds of the deal's subordinate notes. Receivership wouldn't necesarrily guarantee an early amortization, but would make it far more likely.

Investcorp and Sisu have been at odds for some time. In March, the hedge fund shop rejected a refinancing plan under which Welcome Break's senior bondholders would have received 100% of their principal, but junior bondholders would have recovered only 55%. At the time, Investcorp said it would commence bankruptcy proceedings for the Buckinghamshire, England, company if bondholders didn't submit to the plan, but apparently never followed through with the threats.

Investcorp is prepared to do battle with Sisu in court to get its way.

Investors in Welcome Break's deal have been bracing for the worst since February 2002, when the issuer made the first in a series of announcements indicating that the bonds' cashflows weren't meeting expectations. The company then disclosed plans to sell some of the underlying service centers, using the proceeds to partially pay off bondholders.

S&P and Fitch responded with a series of downgrades. The senior securities, which originally had single-A grades, now carry double-B ratings. The junior bonds, originally graded triple-B, now stand at B/CCC. All of the bonds are on watch for downgrades.

Welcome Break has made all scheduled interest payments so far. But the June 1 installment will be the first real test, since the distribution will include 6 million pounds of principal.

It has long been known that there would be some kind of shortfall. In fact, Investcorp fronted the last interest installment. However, the firm has indicated that it won't do so again unless a new receiver takes control of the deal.

It's unclear why Welcome Break hasn't tapped a 26 million pound liquidity facility that would fund the majority of the 30 million pounds due to investors next month - although it's possible that certain conditions necessary to use the backstop have not been met. Any new receivers wouldn't be able to access the backstop.

There are also questions surrounding how Investcorp could place the deal in receivership while Welcome Break Group remains solvent. It's possible that the troubled issuer could wind up in receivership as well.

Fitch analyst Michael Cox said Welcome Break has been unresponsive to his inquiries. The senior securities are scheduled to mature between 2007 and 2015. The subordinate classes are due in 2017. The impending default would be the first for a whole-business securitization, Cox said.



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