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
- 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 firstname.lastname@example.org or (704) 551-2842.
PNC Capital Markets LLC