Forget the tech-stock boom and bust that has captured Wall Street's eye recently - the next wave of dot-com mania may be in the securitization markets.

A slew of Internet companies - including internet service providers (ISPs), sites that offer "free-PC" programs, and business-to-business portals - have approached all three rating agencies over the last six to nine months with concrete proposals for securitization.

According to analysts at Standard & Poor's Rating Services, Moody's Investors Service, and Fitch, there have recently been conversations with various companies discussing the possibility of future-flow receivable-style deals securitizing the cash flows which come from customers who get either free PCs or a rebate in return for signing up to an ISP for a given period of time.

Though the rating agencies would not reveal who they are in discussions with, ABS market sources said that Gateway, Dell, MindSpring (which has since merged with EarthLink), Gobi, Inc. and DirectWeb are among the companies that have floated the idea.

Though the concept is currently riddled with problems - hence preventing any deals from getting done to date - analysts are reportedly in the midst of working out the kinks in the hopes of possibly seeing a deal by year-end.

"Some of the online free-PC' companies and ISPs that have lately been struggling were precisely the ones that have been approaching us for months, looking for ways to raise revenue, and we're still in discussions with several others as well," said Richard Gugliada, a managing director at S&P. "The proposals we've seen to date haven't worked...but they are certainly still trying. Besides the economics of the business models, part of the problem is, how do you guarantee that the revenue stream is actually robust?"

"We had discussions with one company about a month ago, and we are still in the process of considering and researching it," noted Kevin Duignan of Fitch.

According to Scott Friedman from S&P, one deal was "very close to taking off, but all of a sudden, like with a lot of these things, the banks got a little nervous."

Ellen Welsher, a director at S&P who handles new asset classes, said that many of the ISPs are looking at securitization, but "there are some companies that can do this and some that can't. Obviously, some are in a great competitive position and we would do [the securitization] in conjunction with our corporate group.

"This would be considered a hybrid type of product, which a lot of the stuff on the new-asset side tends to be," Welsher added. "I consider it quasi-corporate and quasi-structured, since it will have aspects of both."

Similarly, Jay Eisbruck of Moody's was familiar with the proposed structures, noting that it would be a contract receivables-style transaction with many risks associated with it. "If the online company doing the securitization goes away due to financial difficulties, then customers would be under no obligation to pay," Eisbruck noted. "But there may be ways around it."

Though there are still major hurdles to overcome, one thing is for certain: it is certainly on the radar screens of ABS underwriters as well.

"I saw a tidal wave of these things come across my desk," said an investment banker.

How It Works

Within the last year, many ISPs have tried to boost their market share by offering either subsidies, free PCs or rebates to computer buyers who are willing to pay for long-term subscriptions.

PC manufacturers and retailers are also trying to get involved, partnering to offer discounts or rebates. CompuServe, for instance, is paying $400 to customers who sign up for three years of service. Dell and Gateway, on the other hand, give a year's worth of Internet service to customers who purchase certain packages. Gobi.com offers customers a new computer and internet access for $25.99 a month.

The concept behind the proposed securitizations involves the ISP providing the future-flow receivables garnered from subscribers who either agree to sign a contract with the ISP for a given amount of time (usually 36 months) in exchange for receiving a voucher or free PC, or from regular month-to-month ISP subscribers.

For instance, a common scenario would be for a customer to buy a computer from CompUSA or some electronic store. If the PC was $1000 or cheaper, for example, the store might offer a discount of $400 off the price in exchange for signing up to a certain ISP for a given period of time. In this situation, the money doesn't come from the computer manufacturer or the store, but from the ISP.

Another scenario might be akin to the offers set up by DirectWeb and Gobi, wherein the end-user gets a free PC, but agrees to sign up for three years of ISP service. Meanwhile, the likes of Gateway and Dell have been rumored to be partnering with an ISP such as Mindspring.com, which can offer $500 coupons for Gateway or Dell computers in return for signing up with the Mindspring internet service.

"So, in this future-flow scheme, the companies would purchase future monthly receipts and get cash up front and do whatever they want with it," said Thomas Currie, a director at S&P. "One of the many problems with this, however, is that there are ISPs offering their services for free right now (such as NetZero), and prices are coming down in general, so it is kind of hard to describe a value to the revenue."

Stumbling Blocks

In addition to the fact that many of these "free-PC" dot-coms have already gone under - and that some analysts consider the company's business models to be seriously flawed - there are even more basic problems with the proposed securitizations.

"How do you guarantee continued usage? Does the provider of the service have a rating, and are they going to be around for very long?," asks S&P's Welsher. "Most of these companies are not even profitable at this point.

"With future-flow deals you have to be very confident either that the future product will continue to flow so that the users will continue to pay for it, or that...you have a company with a rating associated with the issuer."

In this case, you could then at least notch the deal off the rating of the company so that the deal is as good as the existence of the company if you don't know that the dot-com will be around very long.

Still, the flaws in the overall concept have soured some observers on the idea: "I met with a lot of these companies a while ago and I thought it was a really bad idea," said one Street banker.

"If company XYZ that is double-B-rated is an ISP and sells off its ISP revenue stream to finance the free computers, what happens when that company goes bankrupt?", said S&P's Gugliada, illustrating one of the pitfalls of the idea. "Why would the customer continue to pay? He wouldn't, because he's not getting the service. So how do I get a rating above that of the company? It is kind of tough. But there are ways around it - insurer, guarantors, back-ups, etc."

In addition to the rating problems, there are a host of other issues to contend with. Firstly, there is a servicer issue: these companies are neophytes at servicing this type of product if a customer makes three payments and decides not to make any more, there could be problems getting a consistent flow of receivables.

Secondly, the customer is signing what is basically a service contract. If there is a service issue - such as if somebody doesn't like the speed of the site - a customer can stop payment.

"Because subscribers can reject these contracts down the road, then you can potentially lose your revenues," said Moody's Eisbruck. "Or if you're looking at monthly subscriber fees, you have to be worried about people canceling their Internet service. Or, what if they decide to switch over to high-speed Internet? ...Additionally, there are various lawsuits out there challenging the validity of some of these contracts. So that presents a legal hurdle you'd have to get comfortable with."

"At the end of the day, how much is there really to securitize?," noted the investment banker. "How much is originating of the free-PC side? At the end of the day you have to have a vehicle which is geared up to handle the receivable that is being created. I'm yet to be convinced."

Solutions

Despite the obvious obstacles to these types of ISP securitizations, most of the analysts agreed that it still might be very possible.

For instance, S&P's Welsher said that if the securitizing company partners with a company that has a rating, or with a company that has such a lock on the market that no one will ever come near them - then such a securitization is possible.

"Other companies might have corporate joint-ventures and liaisons, where the other entity is rated, which can provide guarantees," Welsher noted. "We can try to get some of these companies rated - a lot of these companies have no profits yet - but how do you rate a company that has no profits?"

Still, if a third party stands in between in the servicer role, sources say that this would take some of the "soft risk" out of the equation.

"For instance, if you had a credit-card servicer such as Associates or somebody, or a lease servicer, it might work," a source said.

But don't expect to see such a deal in the near-term: "For as much as the Internet folks like to move fast, rating agencies tend to err on conservatism," said S&P's Friedman. "Probably, if we had been lending venture capital to the dot-coms, there would not have been the boom and subsequent busts."

"But my philosophy has always been, any deal is doable with 100% credit support," Welsher said. "There's always ways to do things."

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