Debt in Disguise

The boundaries between receivables securitizations and loans are blurring.

In addition, “because the underlying assets have a short duration (30 to 45 days), trade receivables don’t pose the same price volatility [risk] as a 30-year mortgage,” says Katz. “The marked-to-market type calls don’t happen in trade receivables.”

Still, part of what backs the commercial paper bought as triple-A credits are receivables from companies that are junk or near-junk credits. For example, in 2003, with the help of Finacity, Sprint Canada secured a five-year deal to sell its receivables to National Bank of Canada’s commercial-paper conduit. Although the deal was A-rated, at the time Sprint Canada had senior secured notes deep in speculative-grade territory. Similarly, Finacity helped create a $55 million program last year for Alliance One International, a single-B leaf-tobacco merchant, many of whose customers operate in emerging markets.

Because the company that originates the receivables is still collecting the payments, servicing risk is a concern in these deals, Katz admits. Indeed, Finacity “buttresses” the servicing capabilities of its clients, he says, which tend to have less-robust systems than companies like WESCO. Finacity sets up the SPE, collects on the accounts, monitors the creditworthiness of debtors, and reports daily on receivables performance.

But even Katz says, “Receivables are very gritty and lots of things can happen — partial payments, delayed payments, totally disputed payments. A lot depends on the operational abilities of the seller.”

And on the judgment of the rating agencies. The purpose of securitization is to make the credit rating of the company practically irrelevant in a financing, so that even in a bankruptcy the receivables cash flow will be protected. The companies originating the securitization need the triple-A or near-triple-A stamp.

In addition to the rating of the originating company (if available), rating agencies examine the credit and collection policies of the company, as well as debtor concentration in the receivables pool and the performance record of receivables, says Ravi Gupta, a senior director in Fitch’s ABS group. Triggers that protect against dramatic declines in receivables performance — like those that set maximum limits for defaults, dilutions, and delinquencies — are also factored in.

But in reality, rating agencies rely more on risk mitigants such as liquidity lines from appropriately rated banks, and credit enhancements such as letters of credit. In a 2005 report, Fitch said that it “…places little or no reliance on the originator’s ability to meet its obligations if its [credit] rating is below that of the issued debt.”

The rating agencies also rely greatly on legal constructs that say the payment stream to investors will not be hindered. For instance, the transfer of receivables to the SPE must be a “true sale.” That is, the seller must not retain too much of the reward or the risk coming from the asset, says Robert Hahn, a partner with Hunton & Williams LLP. In addition, the SPE has to be “nonrecourse” — in other words, the company’s creditors must not have claim to the assets of the SPE if the originating company goes bankrupt.

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