Following a deal last month in which Cendant Corp. packaged and sold $400 million in relocation loans, the securitization of operating assets is proving a hot little trend, with more esoteric deals in the pipeline, according to Steven Cooke, a director at MBIA.
MBIA, which wrapped the Cendant Corp. (or Apple Ridge Funding) transaction, is currently working on a timber securitization and a rail-car securitization, both set to close before the end of summer, though the success of these transactions - or the likelihood they'll ever come to market - is more difficult to gage than bread and butter ABS, Cooke admitted.
"The timber deal we were looking at initially was $500 million, and that one has been put on hold while we do a sub piece of that, which is about $60 million," Cooke said.
The Cendant transaction, part of which is still pending, is structured in three parts. Though the $400 million senior tranche closed on April 27, two $100 million to $150 million tranches will be placed in conduits - the first by the end of the month, and the next by the end of June. Lehman Brothers is the lead manager on the deal.
The Cendant transaction is backed by the cash flows associated with relocation services the company provides to other corporations. Compared to the timber and rail-car deals, however, Cendant is a quasi-operating asset transaction, not nearly as pure, Cooke said.
In the railroad transaction, the cars are leased out to obligors on a short-term basis; however, because rail cars are considered longer term assets, companies use the securitization to get the longer term financing, which is based on a combination of the leases and the asset value of the cars.
"One way to define operating assets is to look at the linkage between the originator and the servicers, and the less you can separate the two, the more of an operating asset it is," Cooke said. "In Cendant, you could remove servicing, but it would be difficult. In a deal like the rail cars, it would probably be impossible."
Cendant's relocation services are a bit more closely aligned to a part-trade receivables, part-equity-advancing deal, where much of the credit analysis is based on the companies who will eventually pay for the services.
"Unlike a trade receiveables deal, you don't have an originator creating a financial asset and then selling it off, you have a company who needs those assets to continue to survive," Cooke said. "It's what their business is. Their business is timber, or their business is carting things around in a rail car."
Because of this, the analysis for an operating assets transaction is more closely aligned to a analysis on the originator.
"It's a lot like looking at secured lending almost," Cooke said. "You have to have a higher comfort level with the company."
For example, in a commercial mortgage-backed securities deal, often the originator can sell off the servicing rights, to the point where it doesn't matter who's servicing the loans. In an operating assets securitization, separating the servicing from the originator is much more difficult.
Another difficulty in bringing these deals to market is that there is nothing formulaic about them, which is why they don't neccesarily have as high a success rate as other securitizations, Cooke explained. While other securitized assets are much more commoditized assets, where each successive deal is easier, the operating cost securitizations are generally only done once by each company.
"Once a timber company has financed their timber, they don't have anymore trees, often," Cooke said. "Or if you did your whole fleet of rail cars, that's it. And they've never done a deal before, so you spend a lot more of their financial picture, their servicing capabilities, and you spend a lot more time looking at the survivability of the company and the volatility of the company."
In the timber sector, where the trees are the actual assets being securitized, Scotia Pacific has done two deals in the past, one still in the market.
Cooke said that over the last six months, MBIA has received several inquiries into operating assets securitization from potential issuers.
As to what other types of operating assets the market might see down the line, "We've been so inundated with so many calls, we haven't really stopped to imagine what else might be out there."