As European corporations continue to look at securitization for funding, there has been growing interest in inventory-backed structures, kicking off what could be a trend in coming years, said analysts at Moody's Investors Service.
"We have noticed over the last two years a growth of inventory securitizations in Europe since the first transaction, the well-publicized Marne et Champagne deal, launched in 2000," said Carole Gintz Yomtov, associate analyst at Moody's. "The success of these transactions signals a nascent receptiveness of the concept among the corporate sector as an alternative source of financing.
Moody's anticipates potential growth in the inventory securitization area within the ABS sector over the coming years. "But this technique is rather complex and demanding, as it requires the seller to have adequate operational procedures consistent with the structural and legal features of the transaction," Yomtov added. "This could explain the timing of completion, which is usually longer than the one of a more classical ABS transaction."
To date there have been a handful of these transactions completed that include: Belgium originated Rosy Blue Carat backed by an inventory of diamonds; French-originated Cote des Noirs backed by an inventory of champagne from group Delbeck Bricourt Martin; and one previous French transaction backed by champagne inventory from group Marne et Champagne.
And while luxury goods have recently dominated the market, Yomtov said that there might be opportunity for other assets to enter in the mix. "We are regularly contacted by other companies that include different commodities like metal, steel - commodities that are good because they can be properly stored," she said.
However, perishable goods, such as dairy products, would not be considered durable goods and therefore is an inappropriate inventory asset class, Yomtov said.
According to a Moody's report, the outstanding inventory securitizations have been successful in part because they are associated with assets that characteristically maintain or increase in value over time.
Along with durability, it is important for there to be an organized open market and secondary market, such as the Antwerp Diamond Index or the Champagne Open Market. These markets should be regulated, and generally be difficult for new competitors to enter, which helps to ensure liquidity and tradability of the inventory.
Moody's uses the "borrowing base" in its structural analysis, which gives an indication of the overcollateralization built into the deal. Obviously, to receive the desired rating, the note amount issued needs to be discounted to the value of the inventory over time, providing the appropriate credit protection to the investor. The borrowing base, said Yomtov, can either be a fixed unit of inventory or a percentage of the current value of the inventory unit.
Moody's will focus on the variation of the value of the inventory on a long-term basis for a fixed amount borrowing base, where the issued amount per unit is fixed regardless of the value. Conversely, Moody's will also look at the short-term volatility of this value for a fixed percentage borrowing base, where the issued amount is adjusted to keep a constant discount with the inventory value.