As Rank Hovis McDougall begins the roadshow for its GBP650 million whole business securitization, the interest surrounding the deal indicates the growing attraction in this type of financing model.

The RHM Finance Limited transaction covers five out of RHM Foodbrands + Ltd eight operating divisions and will partly refinance a bank facility for the GBP1.1 billion LBO of food group Ranks Hovis McDougall by Doughty Hanson.

The transaction reflects an increasing interest in integrating securitization with corporate finance strategic objectives following the wave of M&A in Europe. Whole business securitization is emerging as a tool to raise debt against predictable cashflows of the entire underlying business and enables the acquiring companies to close the transaction at a lower all-in cost of financing than otherwise achievable.

Whole business securitization is still in a relative infancy, says Apea Koranteng of Standard & Poor's, who expects more deals to come this year in the U.K.

"We are expecting for 2001 a growing number of whole business securitizations, in particular in the pubs sector," says Charles Schorin, Global Director of Securitisation Research at Morgan Stanley Dean Witter. "We expect also to see some activity from the health care and utilities sectors, as well."

Whole business transactions emerged in the mid-1990s in the U.K. with the securitization of cash flows generated by a nursing home company. Several transactions followed, involving assets as diverse as hotels, theme parks and airports.

Limited to the U.K.?

Rapid growth of such financing techniques in continental Europe or the U.S. is less likely. Whole business securitization relies on the U.K. creditor-friendly legal framework.

In a typical whole business securitization, the assets that secure the new debt are isolated from the effects of an insolvency of the operating company. This is achieved by the creditors' ability to replace the insolvent operating company by a third party who will then manage the assets solely for the benefits of the creditors.

While an insolvency of the operating company would most likely trigger a default on the company's corporate debt, the securitized debt remains unaffected as a result of the pre-defined replacement mechanism. This mechanism provides certainty that the securitized assets will continue to be managed as a going concern after the insolvency of the operating company.

The U.K. Insolvency Act of 1986 permits the holder of a charge over all (or substantially all) of the assets of a company to control the insolvency proceedings of that company through an administrative receiver, who will manage those assets for the sole interest of the creditors until the debt is repaid in full.

In continental Europe and the U.S., the legal framework protects the debtor. Chapter 11 of the U.S. Bankruptcy Code render traditional security arrangements by an originator nearly useless for the purposes of the timely payment of interest and principal required by capital market investors for highly rated securities. After the bankruptcy of the originator, the federal court has extensive powers to delay the creditors' rights to access their security.

The courts in various European countries can impose an observation period or "moratorium" designed to give them time consider potential rescue plans or allow the debtor to negotiate with its creditor.

"Since many European countries rely on the Civil Code for their legal framework, rapid changes towards a more securitization-friendly' legal environment are not expected", says Benedicte Pfister of Moody's Investors Service. "This does not preclude whole business transactions, but we would have to factor the different legal framework into the rating".

Nevertheless, a few transactions have and are emerging, such as the Marne and Champagne Finance stock-based securitisation in France, or the Arby's franchise-backed deal in the U.S., which bore whole business securitisation features.

Too much success?

Following Punch and RHM transactions, deals are expected to get larger in size. The Punch Group securitization in 2000 opened the way for massive deals.

Punch Funding II was the largest operating business securitisation and the first of managed pubs. It was 80% bigger than the previous largest pub securitization. The transaction had six tranches in all, with specific characteristics tailored to different investors. Because of the large size of the transaction, Punch Funding issued 40% of the total deal as triple-A-rate securities, thanks to a monoline wrap provided by Ambac Assurance Corp. The transaction included as well a significant tranche of double-B risk.

In the RHM transaction, instead, three tranches are rated triple-B and two are rated double-B.

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