Debt in Disguise

The boundaries between receivables securitizations and loans are blurring.

Vincent Ryan is a senior editor at CFO.

What Lies Beneath

Calculating the Cost of Securitization

Tapping the capital markets without a lending bank in between means that even non-investment-grade companies can finance at near what triple-A companies pay.

The “weighted average pool rate” that bank conduits charge to buy receivables is calculated on a daily basis and includes an agreed-upon margin on top of the rate the bank pays.

Short-term rates rose as high as 6 percent during last summer’s credit crunch, as bank conduits could not issue paper for longer than overnight, says William Rutkowski, a vice president in Wachovia Corp.’s conduit-securitization group. But after the Federal Reserve Board cut rates, banks issued paper with longer maturities, dropping commercial-paper rates to below 5 percent.

In the past year, the cost of funds for securitization programs has started at 5.3 percent. However, in some securitization agreements, if the conduit cannot move its commercial paper, the rate passed through to the originator climbs to the prime rate or even LIBOR plus a set spread. If a portion of the receivables securitization facility is unused, the originating company may also have to pay a program fee on that unused amount ranging from 100 to 400 basis points.

CFOs also have to consider the costs of credit enhancement as well as those for the services of lawyers and investment bankers. For example, to ensure investors will not suffer losses from delayed collections or defaults, the originator must sell to the special-purpose entity a level of receivables in excess of the amount needed to pay for the securities issued. In most cases, “true-sale” treatment requires that any residual value from this “overcollateralization” not be available to the originator.

For some companies, information-systems costs could be the highest hurdle. Without an upgrade, a company’s current systems may not be able to handle the ongoing and historical analysis of delinquency statistics, dilution figures, and breakdowns of customer concentrations that rating agencies and bank conduits demand. — V.R.

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