It seems almost inconceivable that just a few years ago the corporate securitization market was a dull backwater in which the odd tap issue was about as exciting as things were likely to get. In the past couple of years the surge in LBO activity has dragged this concept along in its wake, and it is now at the cutting edge of the market – the place to be and to be seen. Even last year’s trailblazers, such as the $1.7 billion franchise receivables securitization for Dunkin’ Donuts and the Hertz LBO refinancing, now seem like ancient history. The market is moving so fast that old certainties are being turned on their heads on a monthly basis.
Certainty one was that corporate securitization is a niche market particularly suited to the UK because of its creditor-friendly legislation and the ability to take a floating charge over the assets. This is long gone, with structuring advances now enabling this technology to be applied from Dunkin’ Donuts in the US to Vodafone in Japan.
Certainty two is that operational cashflows will always limit the amount of leverage that can be achieved. This went out of the window some time ago with the emergence of opco/propco structuring and the exploitation of rampant asset value growth in the real estate market to override such leverage limitations.
Certainty three was that the costs associated with unwinding Spens would act as a brake on refinancing of existing fixed-rate sterling deals. The news this month that a proposed joint venture between Mitchells & Butler and Robert Tchenguiz’s R20 investment vehicle looks likely – even if it entails the unwinding of M&B’s substantial pub securitization programme, which will incur significant Spens expense – shows how little of a hurdle this remains.
Certainty four was that corporate securitizations were long-term, wrapped instruments in which the alternative use (or lack thereof) for the underlying assets featured largely in the analysis. A change in approach by the rating agencies themselves has removed the need for a wrap in many cases and the alternative use for the assets seems to no longer be the dealbreaker that it was. Nursing homes can get to triple-A. And as for duration, this month’s Center Parc’s deal has a 4.3 year weighted average life – the shortest duration so far for a deal of this kind.
This is not the whole-business securitization of old: it is leveraged finance, pure and simple, just funding a private equity buyer until exit. These corporates are not being looked at on the basis of long-term predictable cashflows (the foundation stone for the securitization concept) but simply as a credit to be leveraged against. It requires a complete change in the way in which these financings are approached but also raises questions as to just how much further this concept can be adapted. There are risks in these deals (such as alternative use) that cannot simply be structured away, and investors would be well served to remember that.
