Bondholders of a French champagne whole business securitization could lose close to €7 million on the transaction due to Lloyds TSB Group's decision not to make principal payments immediately, according to rating agency analysts. Nicolas Malaterre, analyst at Standard and Poor's in Paris, says the losses could occur because of a negative cost of carry situation. Lloyds' behavior is unusual but there is no legal breach, analysts agree.
Mary Walsh, spokeswoman for Lloyds TSB in London, said the bank is in discussions with noteholders regarding achieving better returns. She would not divulge what options are being considered or when a decision might be reached.
The deal dates from 2000 and has a two-layered structure, in which Lloyds TSB lent Marne et Champagne €396 million and then issued bonds backed by M&C's rolling champagne inventory through a special purpose vehicle. M&C recently repaid the loan to Lloyds, but the lender is electing to hold the money for the next 18 months rather than pay back bondholders immediately, citing claw-back risk under French bankruptcy law.
Bondholders will lose money under this arrangement if Lloyds, while holding the €396 million in custody, consistently invests it at a lower yield than the coupon due on the bonds. Malaterre said this is a real risk because Lloyds is investing the money at the overnight rate, resulting in a negative cost of carry. The cost to bondholders should this arrangement continue would be €6.9 million. No European ABS investors contacted admitted to holding bonds in Marne et Champagne Finance.