The conduit financing approach
The marriage of buyout and securitization technology in the private market is well tested, and many middle-market deals that involve businesses with stable cashflows have been refinanced via simple trade receivables securitizations for years. Recent examples include the acquisition of Rexel by Eurazeo, Clayton Dubilier & Rice and Merrill Lynch Global Private Equity and UK petrochemicals company Ineos’s buyout of Innovene in February. Conduit refinancing is also often applied to bridge loans in larger deals.
Typically, acquisition debt from deals such as these is refinanced via a trade receivables securitization sold into the ABCP market rather than the term market. The main advantage is cost. “Securitization has always been cheap money lending against liquid assets – the margins are razor thin,” says Mark Nicolaides, partner and head of the structured finance group at law firm Latham & Watkins in London.
Conduit financing is also non-amortizing and can adjust with the corporate’s own working capital movements. But in order for deals to be sold into the ABCP market they have to be structured to a minimum rating of single A plus. This is usually achieved by structural enhancement (such as higher advance rates) rather than buying third-party protection.