Asset-backed Fete

Hot demand for asset-backed securities is opening new vistas.

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You thought there were limits to securitizing assets? Then take a note from Transmedia Network Inc., which lends money to restaurants. Restaurants repay a portion of the loans in the form of dining discounts that Transmedia offers to lure cardholders. The cash flow from Transmedia cardholders’ restaurant tabs supplies collateral for an asset-backed security.

Like Transmedia, dozens of new asset-backed issuers are tapping capital markets with novel securities. Electric utilities are doing it. A Peruvian gold mine is doing it. Even David Bowie is doing it. But not without triggering interest from regulators.

Miami-based Transmedia, says executive vice president and CFO Steve Lerch, effectively “purchases food and beverage credits wholesale and sells them retail.” However, Transmedia does not earn a return until its cardmembers exercise their discount dining privileges at participating restaurants. Because cardholders can elect to use their privileges right away, or let them sit in a drawer, there’s no telling how long Transmedia might have to wait. If Transmedia’s cardmembers stay home, the company collects no cash. But asset-backed investors are patient, apparently, because they snapped up $33 million of these unusual instruments last December. There is protection if the restaurant goes bankrupt–a prudent clause in an industry where bankruptcy is the rule, not the exception. A security interest in the collateral secures Transmedia’s stake in a failed restaurant.

The novel securities were structured by New York­ based SPP Hambro & Co. LLC to monetize the right to cash generated by restaurant tabs. It has not escaped regulatory scrutiny, however. “It was structured as off balance sheet,” Lerch says, “but that was challenged [by the SEC].”

In question: whether a securitization is more like loading debt onto the balance sheet or a sale of deferred revenues, which remains off the balance sheet. In general, regulators decide this question based on the degree to which an issuer can affect the rate of cash flow. If the issuer retains influence, the security is treated as debt. But if the rate of cash flow is outside the issuer’s control, it does not have to be recorded on balance sheets.

Under these guidelines, it looks as if Transmedia should be allowed off-balance-sheet treatment of the assets. But even if the assets remain on Transmedia’s balance sheet, the asset-backed deal is still attractive. “We have secured non-recourse debt collateralized by collateral we don’t own,” says Lerch. Now those are terms worth duplicating.

Meantime, issuers are finding customers for securitizations of vacation time shares, franchise loans, health club memberships, private-label credit cards, collection-agency assets consisting of defaulted credit card debt, and insurance premium loans to drivers with poor records, to name some new twists.

Electric utilities might have devised a neat way to unburden themselves of uneconomic power plants and contracts with neighboring energy suppliers. It’s not quite turning lead to gold, but transforming these stranded assets to cash is almost as impressive. Aided by hot demand for asset-backed securities, lumbering electric utilities are preparing to strip down to fighting weight with fresh capital.

Huge tranches of securities backed by “regulatory assets” are scheduled to tip the scales at around $6 billion in the second half of this year. These deals have “all of Wall Street salivating,” says Phil Guidice, head of the utility consulting practice at Mercer Management Consulting Inc.

Despite the need for heavy collateral commitments to secure triple A ratings, plus investment banking fees, these securities are good deals for issuers. The “low-cost nature” makes them appealing, says CFO Kent Harvey of Pacific Gas and Electric, a subsidiary of PG&E Corp.

Thanks to early deregulation, California is a hotbed of utilities primed to sell asset- backed securities. San Diego Gas & Electric, now a subsidiary of Enova Corp., in San Diego, is gearing up to issue an approximately $800 million tranche; Pacific Gas and Electric has plans to issue $3.1 billion; and Southern California Edison Co. is looking to raise $2 billion. Across the continent, Philadelphia- based PECO Energy Co. is planning to raise $1.1 billion.

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