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Whole business securitizations, or the securitization of the entire future cash flows generated by the operations of a company--as opposed to just one existing asset class-- will be the next trend in asset-backed finance, says Michael Kanef, a managing director in the structured finance group at Moody's Investors Service. He makes an argument on two fronts: First, that these deals are coming to the fore because a lot of prospective candidates do not have tangible assets that can be securitized using traditional methods. Second, that these are "a natural development of the securitization technology as larger and larger arrays of assets are being securitized and issuers are continually pushing the envelope."
The first of a U.S. wave of whole business securitization deals should close in a couple of weeks, adds another rating agency analyst. Declining comment on any prospective deals, Stephen Macy, a managing director at Moody's, says the agency has a pipeline of approximately seven deals, most of which should materialize by year-end. Ellen Welsher, a managing director who specializes in rating structured transactions at Standard & Poor's, says S&P has five to 10 deals under consideration, but would not elaborate further.
Moody's Kanef notes the deals are not necessarily easier to issue, since the company has to identify a steady and predictable stream of future cash flows and that rating agencies have very selective criteria for those transactions. He continues that it does open financing doors for firms that do not have billions of dollars in receivables to securitize such as auto loans or credit cards. He adds that eight to 12 deals that were done in the U.K are being closely examined by U.S. bankers.
Brad Summers, Société Générale's head of new asset securitization in Chicago, says whole business securitizations will soon become, along with junk bonds, another component of the leverage finance market. For an issuer, he says, the initial costs of securitizing all the assets of an entire business are 10 times greater than the same costs for corporate debt issuance. "But all those up-front fees put together are more than offset by the savings you realize on improving the weighted average cost of capital," he emphasizes.
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