Securitization of vendor financing in the telecom industry, via a pooling of finance loans and leases to end-users, has been going on for some time. Now, individual vendors, like Lucent and Nortel, are looking at ways of packaging up these loans in single-issuer securitizations for the term debt market to alleviate pressure on their balance sheets.
Banks, too, are exploring the viability of securitization for some of their telecom clients. The methodology has yet to be ironed out, but some bankers believe that securitization could prove a smart way for vendors to manage their financing risk.
"Our view is that this is an important strategic tool to help corporate issuers further diversify the risk in their business in the financial markets, beyond the unsecured equity or traditional secured financing markets," said Dansby White, managing director in structured finance at Merrill Lynch.
Securitization of vendor financing has been done mostly through the asset-backed commercial paper market, but as yet no equipment makers have sold deals into the term debt market.
It might not be so easy to bring such securitizations to market. The telecom industry remains in turmoil, and even vendors are facing a severe credit crunch. Lucent, which actually planned to offload a $425 million vendor financing loan by on-selling it to investors in the form of a bond offering, had to call the deal off. The company was trying to sell off loans made to Telecorp, but wasn't willing to pay the yield investors were demanding for taking on the risky exposure.
The fact that the deal was backed by loans and leases extended to a struggling telecom company made it a difficult sell, sources said. Lucent was also downgraded because of ongoing liquidity problems.
A challenging task
The excess of telecom paper already in the market poses a major hurdle for bankers trying to package securitizations of vendor financings. Securitization is most effective when there is both a broad geographic diversification and risk diversification in a portfolio. And in the case of telecom equipment sales and leases by a single vendor, there is diversification, but often not enough of it. Also, because telecom is out of favor and a lot of vendor lines are extended to companies rated below investment grade, it will be difficult to get securitizations to fly.
In principle, though, the securitization of vendor financing does make sense. If Lucent and Nortel package the loans they've made to telecom companies, thereby removing them from their balance sheets, they can continue building and selling equipment in order to generate revenue.
However, the weak financial health of the vendors themselves will be a problem, said Gary Jacobi, at Deutsche Banc Alex. Brown. Securitization is also such an inherently complex process, it makes "everything else that much more difficult to do," he said.
To get securitizations to fly in today's market, vendors will have to enlist the backing of higher-rated entities such as AIG - but even then, things will not be easy.
The only vendor finance-backed securitizations that are successful right now are those issued by investment-grade names through the ABCP market. But here, too, there are problems, mostly because the loans made by investment-grade vendors "are of uncertain credit quality, because they are very often for installation of infrastructure and equipment in emerging markets," said Sam Pilcer, an analyst in the asset-backed commercial paper group at Moody's Investors Service.
Still, if vendors like Lucent and Nortel do manage to make it in the world of asset-backed deals, the telecom industry has a chance of pulling itself out of the mud. Securitization will enable these and other vendors to extend more financing to struggling companies, something that just isn't happening right now, Jacobi said.
While Lucent boasts customers such as Verizon and SBC Communications, two companies that don't require vendor financing, the equipment maker does look to companies like Winstar - which recently filed for bankruptcy after it failed to make good on $74 million in coupon payments - as a source of ongoing revenue. And although Lucent is not in a position to continue making loans to less creditworthy telecoms at the moment, if the company was to improve its balance sheet, it would indeed continue to make loans to emerging carriers, albeit on a more selective basis.
"It's like if Ford wants to sell more cars, one way to do it is for Ford to lower its credit standards. It's the same thing for Lucent. The stronger the desire to sell, you lower credit standards and lower the bar to people who, under other circumstances, might not be able to buy the car," Jacobi said.