Term securitizations are gaining appeal as a way to finance accounts receivables.
It’s still more common for companies to finance sales that they have yet to collect on via banks, either through asset-backed commercial paper (ABCP) conduits, with banks as the primary investors, or asset-based loans. But term securitizations offer issuers more flexibility, and the bonds’ high yields and strong performance are attractive to a wide range of investors.
Commercial vehicle maker Navistar has regularly accessed the ABS market, issuing both public and private bonds. Its customers typically have 30 to 45 days to pay for purchases. It’s most recent deal, for $100 million, was completed in May.
“The beauty of a securitization and especially a private deal, is you can craft in more flexibility,” said Mary Ellen Kummer, the company’s assistant treasurer.
Kummer said Navistar customers tend to make sizable purchases, creating “large chunks of receivables” the company can use securitization to limit that exposure. The company may also have to address the special needs of customers, such as extending the payment period to 60 days. And private deals, especially those in the traditional market, are placed with investors with the willingness and capability to understand bespoke risks and deal structures.
Another reason Navistar opted for a traditional private placement over issuing in the Rule 144A market, Kummer said, is the latter’s compliance requirements that make it less economically attractive for smaller deals.
She said that the May deal was purchased entirely by a bank that preferred to fund it from its balance sheet. While Navistar could have funded its securitiztion via an asset-based loan, the advance rate on a securitization was lower.
Brokers for these deals have recently set their sights on expanding the asset class to fixed-income institutional investors, which are hungry for yield and should welcome the performance and safety of this asset class. “We’ve had discussions with what would be truly fixed-income investors about the deals, and there’s an education process afoot because of what the asset class represents,” said Philip Nuelle, managing director of originations at Finacity, the Stamford, Conn.-based firm, that led Navistar’s latest securitization.
Nuelle said that none of these deals have suffered losses, even through the financial crisis. And since receivables typically turn over in 30 to 45 days, investors’ risk exposure is very short, even in longer tenor deals where sponsors must continually replace expiring receivables.
Navistar’s deal was preceded by a £280 global accounts receivables securitization that Finacity arranged in March for Archer Daniels Midland. And in December, it arranged the merger of Mexican glassmaker Vitro S.A.B. de C.V.’s two existing accounts receivables securitizations into a MXN1.2 billion bond offering. In addition to brokering deals, the investment bank provides technology that digests data sent by receivables sellers and transforms it into daily reports for investors.
Like Navistar’s deal, the Archer Daniels Midland and Vitro deals were also purchased by banks, Nuelle said, noting that corporate CFOs often want to place the asset within their established bank group. However opportunities can arise for fixed-income institutional investors when the company doesn’t want to exceed the credit capacity of its bank group, and when the bonds are placed in countries that don’t have commercial paper conduits, such as Mexico.
Accounts receivables securitizations are typically private transactions and can take two forms. Those involving a single seller of receivables tend to be smaller, unrated and placed with one or a few investors. Conduits pooling receivables from several companies typically are sold in the Rule 144A market. Although some deals have tranches stretching out three years, most have tenors of a year or less. The short maturities have enabled their primary investors, banks, to achieve off-balance-sheet treatment and reduce their regulatory capital requirements. Enticed by the bonds’ relatively attractive returns—typically a premium of 20-to-30 basis points for the top rated tranches and yields of 700 basis points or more on the subordinated portion—some banks leave the longer-dated bonds on their balance sheets.
The number of fixed-income shops investing in receivables ABS appears to still be small, but growing. The National Association of Insurance Commissioners gave the green light early this year for insurers to invest in the deals when it expanded the definition of working capital finance instruments.
While ABCP conduits still remain the most common destination for accounts receivable assets, “I’ve been hearing more and more about the possibility of doing rated, term accounts-receivable deals, said Kevin Corrigan, a senior director at Fitch Ratings.