Rating uninsured structured transactions backed by single corporate loans to the triple- A level has, until now, has not been possible. But Standard & Poor's has developed criteria that illustrate how issuers can employ structures that blend recovery and CMBS expertise.
These hybrid deals, coined corporate market value securitization (MVS), would involve the securitizing corporate loans through a special-purpose entity, with notes issued into the capital markets that are backed by the loan and, ultimately, the borrowing corporate entity's business assets. The S&P rating analysis considers both the default of the underlying loan, and the recovery proceeds from the sale of the underlying assets post-default. The proceeds from the sale are used to repay the rated debt.
According to S&P, the starting point for rating MVS transactions is to determine the amount of debt that can be recovered with a probability commensurate with triple-B or higher. Analysts determine the value of the business or its assets that could be sold following an event of default resulting from a triple-B stressed scenario.
"As you ascend the rating scale from triple-B, the proportion of the recovery value that is certain decreases sharply in our view," S&P analysts said. "Assuming the triple-B recoveries were 60% of the company's or asset's current present value, we might consider that one-third of this recovery amount was certain to achieve a triple-A level. However, this analysis only holds if the structure compels a default to happen before there is any significant deterioration in value, and that the assets offer strong recovery potential and can be sold following default."
Suitable candidates
The best candidates for executing a MVS structure, S&P said, would be operating companies resilient to distress scenarios with assets unlikely to materially deteriorate in value following a transaction default, which are also better placed to be successfully acquired if put on sale. These businesses are likely to operate in mature sectors with strong barriers to entry and limited substitution and reputation risk, involving clearly identifiable cash flow-generative assets that do not rely on the unique skills or talents of a small group of people. Companies that have issued loans with recovery ratings of 1' or above are examples of these good candidates for MVS transactions and include companies such as Europcar Groupe S.A., Ashtead Group PLC and London Merchant Securities PLC."
"We consider that a significant number of corporate companies that have borrowed on the corporate loan market in recent times would have been potentially good candidates to back a corporate MVS," an S&P spokesperson said. "Issuers can benefit from increased diversity in their financing options, a reduction in their overall financing costs and as a related consequence, we could see enhanced liquidity in the leveraged loan market as a repackaging market for these loans opens up."
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