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July 2001

Corporates prefer securitization





       
Peter Anderson
"Long-term growth in the asset-backed market will come not from banks but from corporates." So reckons Maarten Stegwee, head of European asset finance at Credit Suisse First Boston. Speaking at Euromoney's global borrowers' and investors' forum in London last month, Stegwee explained why so many observers expect explosive growth in corporate asset-backed issuance. "If we had the luxury of redesigning the corporate balance sheet from scratch to create the best possible long-term capital structure, securitization would have a big role," he said.
Right on cue, one of the most eagerly awaited securitization deals of the year was priced in the last week of June. Through a special vehicle, TI Securitization, Telecom Italia raised e700 million of debt secured by telephone bill receivables. The deal, arranged by WestLB, BNP Paribas and Finanziaria Internazionale, marks the first time receivables of this sort have been securitized. Telecom Italia now hopes to become a regular visitor to the asset-backed market.
With their familiar pools of capital drying up, telecom companies have little option but to scrabble for any available source of cash. A number of telcos are known to be looking hard at securitization. But in other industries, the switch from bank or unsecured bond finance to securitization forms part of a long-term game plan. The UK pub industry, for example, is now financed mainly in the asset-backed market. And increasingly, other companies that have largely property assets are also turning to the market.
In a report published before Telecom Italia's deal, Dresdner Kleinwort Wasserstein's analysts identified 13 corporate securitization deals this year in Europe (see table). Most issuers could broadly be described as property companies, but the list also includes a food maker, a water company and a shipping line. The report's authors reckon that corporate deals have accounted for 23% of issuance in the first six months of this year, raising a total of e6.8 billion.
European corporate asset-backed deals 2001
Pricing date Originator Asset class Amount (?mn) Country
15-Jan-01 Volkswagen Leasing auto loans and leases 750 Germany
01-Feb-01 Enterprise Inns pub revenues 196 UK
15-Feb-01 Canary Wharf commercial property leases 189 UK
22-Feb-01 Eurotunnel whole business 1433 UK/France
26-Feb-01 Foodbrands+ whole business 1037 UK
27-Feb-01 Unique Pub Company pub revenues 528 UK
28-Feb-01 Sainsbury's Supermarkets whole business 471 UK
27-Mar-01 Chantiers de l'Atlantique whole business 324 France
06-Apr-01 THPA whole business 486 UK
26-Apr-01 ProLogis Trust commercial property leases 214 Europe
02-May-01 Dwr Cymru whole business 3070 UK
31-May-01 Canary Wharf commercial property leases 1353 UK
15-Jun-01 British Land supermarket leases 935 UK
 
Source: Dresdner Kleinwort Wasserstein

The range of assets that can be securitized seems to grow all the time. As well as physical property, inventories, trade receivables and property leases have all been securitized. And in leveraged buyouts, whole businesses are now pledged to bond investors. "Any assets that generate stable and predictable cashflows can be securitized," said David Basra, a director in Citigroup's securitization department, speaking on the same panel as Stegwee. "And increasingly, we are also beginning to see deals based on complex or unpredictable cashflows as well."
A straw poll of borrowers at the conference gave some insight into the likely growth of the market. Some 42% of borrowers attending the presentation had already used securitization. But a full 82% of respondents - including both corporates and other borrowers - were contemplating using the technique to raise funds in the future.
The biggest benefit of securitization is that it can provide cheaper funds than unsecured borrowing. But another part of their attraction is that asset-backed bonds can have long maturities. In a euro market that generally does not go out beyond 10 years, that can be very appealing.
But the carrot of cheap and long-term funding is reinforced by a stick. Banks have become less willing to lend to companies, particularly small or unrated ones. And certain kinds of corporate debt could prove even less palatable to banks in future. "Many people have under-estimated the impact of the new Basle accords on low-rated corporates," says Stegwee. "The new rules will constrain their access to bank funding by imposing a high capital charge on banks that lend to them. These companies will either need to look at the high-yield bond market - if it is available - or at securitizing some of their assets."
With a growing investor base for asset-backed bonds and an increasingly favourable regulatory environment, securitization might seem the answer to many European companies' prayers.
But this market is no easy option. For one thing, securitization hurts companies' existing debt holders by reducing the amount of assets available to service unsecured debt.
The two leading rating agencies, Moody's and Standard&Poor's, recently released guidelines about what impact securitization would have on senior ratings. Perhaps surprisingly, they claim that a little securitization does no harm to a company's general creditworthiness. If, as a general rule, asset-backed bonds are less than 15% of the company's total debt, they should not have an impact on senior unsecured credit ratings.
But as corporate use of securitization has increased, senior unsecured debt has begun to suffer. In June, for example, rating agency Fitch downgraded British Land by one notch to BBB, citing the company's growing use of securitization as its reason for the action.
UK property companies have been among the most enthusiastic converts to the asset-backed market. Canary Wharf's financing strategy is based squarely on securitization. Indeed it aims to eliminate unsecured debt altogether. The group's managing director of finance, Peter Anderson, believes that securitization is a better source of capital for many property companies than bank loans.
And he reckons it will help property companies to survive the inevitable troughs of their business better than bank funding ever could. "Property companies went bust in the 1980s not simply because property prices fell, but because bank liquidity dried up," said Anderson, speaking at the same conference. "In that sense, securitization is a more reliable source of financing for us than bank lending."
But the other big drawback of securitization is the sheer volume of preparation involved. It requires a big input of management time as well as the services of rating agencies, bankers and lawyers. Anderson reckons that borrowers should be looking to raise a minimum of £500 million ($350 million) from the market, otherwise it is not cost effective. "An asset-backed deal takes a lot of work," he says. "For a first deal you are looking at spending at least three months working with your bankers and lawyers and with the rating agencies. But subsequent deals are easier once the first transaction has been done."
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