Ballantyne Re Reg XXX life securitization investors facing losses: Fitch

Scottish Re’s 2006 Ballantyne Re Regulation XXX type life insurance securitization transaction will struggle to return much capital to investors following huge mark-to-market losses on the assets in the underlying collateral accounts, according to an update on the deal from rating agency Fitch Ratings.

Ballantyne Re had much of its collateral invested in a portfolio of residential mortgage-backed securities (RMBS) and other asset backed securities (ABS) but the portfolio of assets has faced mark-to-market losses and extremely poor performance. As a result Ballantyne Re’s liabilities exceed the current book value of its assets by a significant margin, according to Fitch.

Of the three classes of notes issued by Ballantyne Re, the Class A-1 notes continue to make interest payments to investors and Fitch expects this to continue for the forseeable future. However, unless there is a remarkable bounce back in the values of the underlying assets Fitch does not expect investors in the Class A-1 notes will receive their full principal back.

Fitch has estimated that Ballantyne Re may be able to pay back approximately 40% of investor principal for the Class A-1 notes, if current market values for the collateral assets don’t change significantly.

For the other two tranches of notes, Class B-1 and Class B-2, Fitch believes default is now inevitable and that noteholders will not receive any more interest payments or recover any principal.

The Ballantyne Re XXX life insurance securitization was an interesting transaction, coming in at around $2.1 billion in total with other tranches of notes which were not rated. Ballantyne Re is a special purpose vehicle from Ireland. It was established to enter into a reinsurance agreement and conducting activities related to the notes’ issuance. Ballantyne Re issued the various tranches of notes to finance excess reserve requirements under Regulation XXX for the block of business ceded under the reinsurance agreement with Scottish Re.

The problem for this transaction lay in the selection of assets for the collateral account of Ballantyne Re. The collateral was invested in subprime residential mortgage-backed securities and other asset backed securities. Many of these assets lost significant value during the 2007/8 financial crisis meaning that interest payments are were near impossible to make. Scottish Re itself took to making up missing interest on the payments for some time to attempt to meet obligations to the deals investors. Insurance-linked securitizations such as catastrophe bonds and collateralized reinsurance transactions tend to use much safer collateral assets, such as Treasury money market funds, these days.

With little chance of recovering any outstanding principal on two rated tranches and the other Class A-1 notes not likely to offer a full recovery of principal there could well be a future in the courts for Ballantyne Re as investors may choose to sue those responsible for the asset selection choices made.

Fitch notes that losses could deteriorate even further should the loss experience of the underlying portfolios of life insurance get worse or should the asset values decline more.

We’ll update you as the picture of default for Ballantyne Re becomes clearer in the future.

Read our older articles on the Ballantyne Re deal:

– Ballantyne Re life insurance securitization default almost inevitable (Sept 2011)

– Loss faced by Ballantyne Re life securitization investors becomes clearer (Aug 2012)