Unlock hidden assets


For companies seeking additional
working capital to support current
business needs or to finance growth or an acquisition, funding through securitization might be the answer. In the last 20
years, securitization has been the fastest-growing segment of the global capital markets. Securitization has enabled companies
to unlock embedded asset value to
increase liquidity, lower financing costs
and diversify their overall capital structure,
thereby enhancing enterprise value.

Smart Business spoke with Reggie
Imamura, senior managing director of PNC
Capital Markets LLC, to learn how companies turn corporate receivables into asset-backed securities.

What is an asset-backed security?

Securitization converts a diverse pool of
assets into marketable securities that are
sold to investors. The conversion legally
isolates the pool of assets from the bankruptcy estate of the company originating
them. Securities backed by these assets
and issued into the market are called asset-backed securities (ABS). The assets can
be corporate receivables, such as
accounts receivable, or consumer
assets, such as credit card receivables.
Depending upon the frequency and
characteristics of the cash flows generated by the underlying assets, these
securities take the form of bonds or
notes, or commercial paper.

During 2006, over $3 trillion in securitized
debt was issued in the global capital markets. Investors choose asset-backed securities for several reasons. First, they offer risk
diversification as cash flow from future
receivables is collected from a diverse
group of obligors. Second, securitized debt
obtains higher ratings than other forms of
corporate debt because the underlying
assets are isolated from the bankruptcy risk
of the originating company.

Why do companies securitize receivables?

There are a couple of reasons why middle
market companies might want to consider this financing option. Primarily, securitized
debt has a lower interest cost than corporate debt because the assets are legally isolated from the company’s bankruptcy
estate. In addition, securitization increases
a company’s liquidity and diversifies its
funding sources.

Take, for example, a company with a large
pool of account receivables. The cash due
from these receivables is not immediately
available and, depending upon the terms of
the obligor, payment may not be due to the
company for 30 or more days. Through
securitization, the company can receive
immediate financing for these receivables
at a lower interest cost because the receivables’ cash flows are legally segregated and
protected from other creditors in the event
of a bankruptcy. This legal separation of
the receivables has no impact on the
company’s operations; the business
will continue to manage its accounts
receivables (and customers) in the
same manner as it did before the securitization. However, the proceeds
from the securitization may be used
to originate more assets, to reduce
outstanding debt with higher interest
costs or to provide for other capital
needs.

What types of assets can be securitized?

Any company with assets that generate
relatively predicable cash flows may be
securitized. The most common asset types
include:

  • Corporate receivables

  • Credit card receivables

  • Auto loans and leases

  • Mortgages

  • Student loans

  • Equipment loans and leases

Does securitization make sense for my company?

Securitization may be a source of financing
if your company generates total domestic
receivables of $40 million or more. These
receivables can be in the form of accounts
receivable, credit card receivables, loans or
leases.

Securitization can enhance the enterprise
value of your organization. Through innovative structuring, securitization provides many
middle market companies with direct access
to the capital markets. Middle market companies across a wide spectrum of industries have unlocked the value of their
assets and obtained the necessary capital
to support their current operations and
future growth through securitization.

To learn how a securitization facility
is structured, including the process
and timetable to execution, check out
PNC’s Middle Market Advisory Series
at pnc.com/go/securitization.

This article was prepared for general information purposes only and is not intended as
specific advice or recommendations. Any
reliance upon this information is solely and
exclusively at your own risk. PNC Capital
Markets LLC, a registered broker-dealer, is a
member of SIPC and NASD.

REGGIE IMAMURA is senior managing director of PNC Capital
Markets LLC. Reach him at [email protected] or (704)
551-2842.

Reggie Imamura, Senior managing director
PNC Capital Markets LLC