Corporates are looking to securitisation to lift the value of their real estate investments, reduce debt costs and optimise financing.

Securitisation – whereby securities are issued backed by assets – is a financial technology most commonly associated with financial institutions. Mortgage-backed bonds, for example, are an important funding tool for many mortgage banks. It is also, however, a valuable technique for corporates in three main areas: real estate monetisation, whole business securitisation and trade receivables.

Corporates have increasingly begun to question the rationale of owning and operating real estate. The key question to ask is: if the objective is to make widgets, what is the strategic or financial wisdom in owning and managing premises – particularly in view of the management time and energy it demands? A sale and leaseback arrangement with a property firm offers a possible alternative.

Unlocking real estate value

“Besides enabling a shift in management focus to its core business competencies, sale and leaseback enables a corporate to unlock the value in its operational real estate,” says David Newby, European head of commercial mortgage-backed securitisation at ABN AMRO. “This value, generally in the form of upfront cash proceeds, can then be strategically deployed in core business areas or even used to fund business expansion or development, which in turn has the potential to improve overall returns and profitability.”

Additional benefit is derived from the limited impact the securitised debt has on a company’s leverage. “Although the rating agencies often tend to include debt financed through a sale and leaseback structure in their adjusted leverage calculations, the corporate benefits from the fact that the debt is backed by specific ring-fenced assets – without forming a part of the corporate’s overall general indebtedness. And because of the way it is structured, it also has the intrinsic potential to appeal to a wider cross-section of the investor base,” says Mr Newby.

Whole business securitisation

Whole business securitisation (WBS) is, essentially, the securitisation of future cash flows. In 2003, more than E8.3bn (approximately 20% of overall asset-backed securities issuance) was raised in Europe using WBS technology.

WBS is most commonly used as part of an acquisition strategy where the target business has very stable and predictable cash flows and cost structures. “A high barrier to entry and clearly visible long-term trends are also optimal features of the business, making water utilities, pubs and nursing homes ideal for transactions,” says Robert Palache, managing director and head of real estate, corporate securitisation and infrastructure finance at Barclays Capital.

A key advantage of WBS over other forms of financing is the ability to raise a higher debt quantum at a lower cost of funds. It also allows for considerably longer debt tenors, typically 15-30 years, compared with the conventional syndicated loan market of 8-10 years.

Masroor Haq, director, structured capital at ABN AMRO, says: “The longer maturity results in significantly lower annual amortisation cost. Although WBS structures do impose certain restrictions, added by the covenants attached to the securities, it has other advantages: typically, such debt achieves an investment grade rating that offers a lower overall cost of finance than can be achieved in the corporate bond market.”

It is expected that in the technology’s next phase of development, other regulated utilities – such as electricity and gas distribution networks – will come into the arena, given their predictable revenues and quasi-monopoly status.

“A growing number of innovative WBS structures are being introduced, a recent example being the Moyle Interconnector transaction in April 2003 [securitisation of revenues related to inter-connectors between two electricity grid networks]. While repeat issuers, such as pubs and water companies will continue to utilise the highly leveraged WBS financing structure, it is expected that a greater range of revenue-generating companies will enter this market,” says Mr Haq.

Trade receivables

Corporates are also seeing the benefits of securitising their trade receivables via a bank’s conduit vehicle, which then sells the asset-backed securities on to investors in the form of, for example, commercial paper (CP).

The securitisation of a portfolio of trade receivables optimises the management of the working capital needs of a corporate, and represents a very efficient source of short and medium-term financing. “The originators benefit from the prime rating of the conduit program as well as from their strong investor base being able to access at the best levels of the CP market,” says Luis Carvalho is director, head of European conduit and portfolio management, ABN AMRO, whose Tulip Program has commitments in excess of E13bn; about 40% of its assets are trade receivables purchased from large corporates or multinationals.

There are ancillary benefits that normally materialise with the ongoing servicing of such receivables, especially in cases of transactions involving several subsidiaries in different jurisdictions. “These include the improvement of the global average collection periods, centralisation of credit exposures to a same debtor/client group, and higher control of open credit notes, other dilutions and disputes,” says Mr Carvalho.

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