"Whole company" securitizations, a concept so new that is still nebulous for many players in the asset-backed securities market, could become the next hot asset class within the next 12 to 18 months.
The concept, which in a nutshell is the practice of a company securitizing all or large pieces of its entire balance sheet as an alternative to traditional methods of financing, is still cloudy enough that market players have varying definitions and names for it. So far only a handful of the deals have been issued, all small-volume deals in the U.K. or Europe.
Expect that to change, as some market sources predict the first U.S. deal to hit by the end of 2001. With the growth of the Internet providing a space for third-party financial companies to challenge commercial banks for providing funding to companies, the potential to do a type of rolling financing via securitization is more attractive now than ever.
"I think this is a huge opportunity for the ABS sector, but not many players are well positioned now to do anything about it," said John Macauley, a vice president with global management consultant A.T. Kearney. "It's something conduit managers and risk managers in ABS world need to begin to think about. Once the floodgates start to open, they'll need to."
Whole company deals (also called full company securitizations) are perhaps the ultimate fulfillment of the asset securitization markets, which began growing in earnest in 1995. Securitization began as a way to take specific items off a company's balance sheet - commercial loans, credit card receivables, home-equity loans - and soon expanded to encompass all different methods of future income, including tobacco legal settlements, rock star future royalties and potential natural disaster insurance.
What the concept of whole company deals does is greatly expand the scope for a company. If an automobile company now receives funding by securitizing its loans and leases, it could go further and securitize all its sources of income, including trademarks, franchises, rent payments and hard assets.
"You're securitizing the ongoing income producing capability of the company," added Tom Currie, a director at Standard & Poor's Ratings Services.
The most recent deal came last month when composer Andrew Lloyd Webber used a whole company bond to refinance Really Useful Theatres, the London theatre group he bought early this year. The $175 million deal, arranged by Lehman Brothers, is backed by cashflows from all aspects of Really Useful's operations, such as refreshment and ticket sales as well as theater rentals. Really Useful, a joint venture between Lloyd Webber's theatre group and private equity firm Bridgepoint Capital, owns 13 London theatres.
The U.K. has been the hotbed for such deals, having also hosted a pub franchise chain whole company securitization last year, in part because the country is perceived as being creditor-friendly. "It's easier to isolate the assets that are securitized in the U.K.," said one analyst. "If a debtor filed for bankruptcy, the creditor might be able to get their hands on the collateral quickly rather than deal with a bankruptcy court."
The potential for a U.S. whole company securitization has grown in the last few months, however. Several sources said that the concept of whole company deals, which has been bandied about as a pie-in-the-sky possibility for years, is now much more concrete. Rating agencies said a number of proposals have hit their desks in recent months. The growing consensus is that the sector could become a viable, thriving part of the ABS market, not a well-publicized but low-volume niche like musician royalty securitizations.
What has helped drive innovation is the potential for a new generation of financial providers centered on the Internet that will challenge commercial banks in offering financing packages for companies. In the past, a manufacturer would turn for financing to a lender for a loan package at a set rate. However, a third-party could offer an alternative via a series of whole-company ABS that would take large pieces of a manufacturer's holdings off its balance sheet.
"The implications for banking industry are huge," Macauley said. "The last big on-balance sheet [business] they have is commercial/industrial lending and that's now likely to be threatened."
The long-term potential and the high stakes involved should make the securitizations a sure thing in the next 12 to 18 months, observers said. "Enough people are looking at this now that I think there will be a series of experiments," Macauley added. "This concept will grow geometrically."