Debt in Disguise

The boundaries between receivables securitizations and loans are blurring.

“Securitization divorces the creditworthiness of the [company] from the credit of the pool,” says Mark Spradling, a partner with Vinson & Elkings LLP. “True sale and nonconsolidation are part of that separation.”

But the opinion that legal control of receivables has passed to a third party has not been litigated in the bankruptcy courts. When LTV Steel declared bankruptcy in 2000, it filed for access to securitized receivables, arguing that its securitizations were “disguised financings.” When a court agreed to hear LTV’s arguments, stunned lenders quickly arranged debtor-in-possession financing for the company — provided it dropped its claims to the receivables. As a result, the issue has never been resolved in the courts.

“There’s no bright-line test,” says Spradling.

Crossing a Fine Line

The delicate structure of securitizations is evident in the experiences of companies that have — sometimes accidentally — pierced the legal bubble on which this form of financing depends. Aspen Technology, a provider of process-optimization software, was forced to restate its financials going back to 2005 because it inadvertently violated the true-sale structure of its securitization. Salespeople at the company did so by licensing additional software to customers and consolidating the remaining balance of older installment receivables into the new contracts. The securitization agreement did not allow that in most cases. As a result, Aspen unintentionally regained control of some securitized receivables and was forced to alter its balance sheet.

It also is relatively easy for a company to cross the nonrecourse boundary on purpose. At $2.3 billion Volt Information Sciences, a staffing firm that has a $200 million securitization program, a customer with a large receivable whose debt was in the company’s securitized pool filed for bankruptcy last summer.

“Technically, it was not mine to do anything with,” says Volt senior vice president and treasurer Ludwig Guarino, speaking of the debt. But when a debt buyer was willing to pony up 90 cents on the dollar, Guarino got Mellon Bank N.A., sponsor of the commercial-paper conduit into which Volt sells its receivables, to give Guarino a release on the lien. “The cash goes into the SPE, just like any other cash collection,” Guarino says.

Not all banks would have allowed such an arrangement. A key question in true-sale opinions is, after all, “Is there recourse back to the seller on failure of performance of the asset? The more recourse there is back to the seller, the less it looks like a sale and the more it looks like a loan,” Spradling says. This, of course, was why many mortgage originators were reluctant to help struggling homeowners rework the terms of their loans this past summer.

In July, under pressure from Congress, the Securities and Exchange Commission gave subprime-mortgage lenders permission to modify already-securitized home loans — if a default seemed likely — without taking the assets back on their balance sheets. The impact that guidance might have on other securitizations simply was not discussed. But clearly, the ability of corporations to deal with debt that has been securitized is turning into more of a gray area.


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