More companies outside of the U.K. are looking to reap the benefits of whole business securitizations, but with insolvency regimes outside Britannia less bondholder- friendly, getting true whole business structures off the ground will require some careful maneuvering.
In the U.K., bondholders are allowed to seize collateral and benefit from cash flows in the event a company's declaration of bankruptcy. "It's true that for sometime now, a number of countries have expressed interest in executing U.K.-style whole business deals," said one market source, "but insolvency regimes throughout Europe limit how these deals can be structured outside of the U.K."
This has long been a challenge in structuring true whole business deals in the U.S., where current bankruptcy law is bias to debtor.
In Europe, a number of countries have made forays into the whole business arena. According to a Morgan Stanley presentation, whole business securitization covers a wide range of transactions, including transactions with substantial contracted revenue or asset backing as well as those with limited contractual revenue or asset backing.
In addition, whole business securitization covers a variety of different credits; consequently, approaching these deals with a one-size-fits-all credit model is dangerous and virtually impossible. "Placing any of these various securitizations into one particular box is difficult because of the different levels of operating risk for each," explained one analyst.
As more companies look at the possibility of executing whole business structures, market participants have begun to question whether what is being securitized constitutes true operating risk. "In terms of achieving a true whole business securitization, the present insolvency regimes of European countries would be a hindrance," said one market analyst, "but more and more countries are looking into whether alternative structures could work as well. They would not draw the same benefits, so you might not be able to achieve the same high rating levels, but the question remains as to whether they could achieve at least some of the benefits."
Alternative structures should see further development in 2003, said one market source. Many of the alternatives being discussed are still in their preliminary stages, but one option that has emerged, explained the source, is the possibility of enhanced leveraged buyout structures that would give more credit to the collateral and asset value. "Nothing as of yet has appeared in the market, but it is a possibility that some bankers are looking into," said the source.
It's an ideal time to investigate options, as countries such as Germany are preparing to hand down the keys to a new generation of operators. "I suspect that the German economy will go through restructuring," said one market analyst. "The post-war generation that created the Mittelstand will pass the key onto the next generation, and I am pretty sure there will be many private equity firms sniffing around these targets. This would be the ideal place for a whole business framework to evolve."
Last year in Finland, the first and largest whole business securitization of forestlands owned and managed by Finland-based Tornator Timberlands Oy was completed. And while the structure successively tested the Finnish insolvency regime, an explosion of follow-on deals from the country is unlikely given the limited size of the Finnish market. "It would probably make more of an impact in terms of volume and benchmark deals if the French or German market evolved more rapidly," said one source.
In France, however, the bankruptcy court currently takes control in the event of insolvency, and bondholders have very little control of the process. In Germany, the number of inquiries surrounding the subject has led to some queries into methods to work around the current insolvency regime, but it's still not completely clear whether bondholders would be able to take possession of operating assets in a timely fashion, explained one analyst.
Italy, however, is making significant headway and continues to introduce legislation favoring innovative securitizations. Sources said that there has been talk of a new law that could potentially make whole business securitizations easier. It would be ideal for Italy, which, like Germany, is poised to undergo industrial restructuring, said one source. There is currently a $148 million Rome airport transaction dubbed Romulus Finance S.r.l. marketing. Standard & Poor's has assigned a preliminary rating of A-' to the deal's unwrapped notes and AAA' for the Ambac-wrapped paper.
On the utility side of whole business deals, the Irish-based telecom provider Eircom is expected to re-enter the market at some point this year talk of the transaction began late last year. There are also continued rumors that German-based telecom provider Deutsche Telecom might also enter the market with a securitization. In addition, a U.K. water company securitization from Wessex Water is said to be in the works along with a possible railway deal. In the transport sector, market participants said that a $366 million Portuguese railway deal is on the way for Rede Ferroviaria Nacional, the state-owned Portuguese national railway. The format that any of these deals will take, however, is still up in the air.