Debt in Disguise

The boundaries between receivables securitizations and loans are blurring.

Accounting Calls It Debt

Technically, according to Financial Accounting Standard No. 140, SPEs in securitizations qualify for off-balance-sheet treatment. But some corporations that securitize receivables, desiring to bring financial reporting in line with economic reality, are bringing them back on balance sheet and calling them debt. On-balance-sheet treatment, though, removes one of the prime advantages of securitization — raising capital without increasing the company’s leverage.

In December 2006, WESCO amended the accounting treatment of its $500 million securitization program by including receivables sold on its balance sheet and labeling them secured borrowings. The receivables showed up as short-term debt, instead of just appearing in a note to accounts receivable, and the costs of the securitization appeared on the interest expense line.

“We did it primarily for transparency and good governance. It has made it a lot easier for people to understand, and we don’t have to do reconciliation between GAAP and non-GAAP,” says Van Oss. “It had no impact on the economics.” The rating agencies did not downgrade the transaction nor did the commercial-paper conduit ask for more collateral to reflect the new treatment. Dean Foods, a $10 billion dairy-products maker, handles its securitization similarly, consolidating the assets of three SPEs. Volt does also.

“Professionals — debt analysts, bankers, and equity analysts — all add [receivables] securitizations back onto the balance sheet in figuring leverage and debt ratios,” says Bob Finley, managing director of Fifth Third Bank’s asset-securitization business. “It’s window dressing at best. Let’s just call it debt.”

Blowback from the era of Enron is one reason companies are tinkering with the accounting. More often than not, though, non-investment-grade companies still want to be able to handle securitizations off balance sheet, says Finacity’s Katz, adding that the companies that move securitization back on the balance sheet “are the companies that have the luxury of taking the high road.”

Too Big to Fail?

Securitization is definitely in the sights of banking regulators. In the wake of last summer’s credit-markets crisis, the International Monetary Fund warned banking regulators not to stifle the “enormous benefits” from financial innovation. But the IMF did call for a review of the different models by which banks pass on credit risk to investors. It also suggested that the rating agencies use different ratings for structured products and regular corporate debt.

If securitization were to go away or be drastically curtailed, says Van Oss, WESCO would just shift its debt to its slightly more expensive asset-based revolver.

But even securitization’s detractors admit it is probably here to stay. In the judgment of New York Law’s Kettering, this form of structured finance is too big to fail. If there were ever a ruling in the bankruptcy courts that nullified the structures of true sale and bankruptcy-remote SPEs, the rating agencies would have to downgrade all trade-receivables securitizations to the credit quality of the originators, he says.

“A court aware of the stakes is very unlikely to make such a ruling,” says Kettering, “and should that event occur, Congress would bail out the product.”

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