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Thursday, Mar 18, 2004

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Opinion - Accountancy


Invoice-activated software

Securitisation can get help from technology, says Phillip Kerle

SECURITISATION transactions have a reputation among corporate treasurers that is probably deserved. Typical feedback from those who have completed such deals generally includes the following criticisms: The transactions are too complicated; the extra work they entail is not appreciated by the operating businesses involved; there are cost overruns for professional advice; there are often delays, which add to the frustration. These issues are especially relevant if the deal involves traditional vendor finance arrangements — that is, leases or hire-purchase arrangements. Here the complexity of the underlying asset is multiplied by the securitisation transaction. But times are changing, and there is new financial and systems technology available that allows a much simpler form of securitisation to be completed.

It involves the financing of invoices at the enterprise level. Such deals can reduce funding costs by millions of euros and open up alternative sources of finance at the same time. Although the idea of securitising invoices is not new, recent technological developments have made this much easier to do and have opened up the market to firms rated below investment grade. Financial managers are now focusing on this new opportunity in the light of the increasing tightness of the banking markets.

Securitisation involves financing trade debts that are originated by operating companies within a group via a wholesale arrangement. Typically, transactions are worth euro 50 million or more and achieve a funding cost in the region of between 50 and 150 over the London inter-bank offered rate all-in.

The securitisation delivers an `AA-rated asset', uplifted from the originator's balance sheet, which may be rated substantially lower or even be unrated. This is achieved because the debtor book usually represents a diversified portfolio of credits that can be insulated from the creditworthiness of the originator. This `structured asset' is much more attractive than bilateral finance to lenders and/or the capital markets, and that is how the reduced funding cost is delivered.

Historically, such an arrangement would not have been easy for a typical multinational group. With operations in different industries and countries, there is usually no centralised accounting or tracking system and operating companies are often fiercely independent.

A consolidated and centralised systems infrastructure was once a fundamental requirement of any securitisation. This has now changed as a result of new software that can deliver the necessary reporting and tracking without disrupting the existing infrastructure or interfering in local operational matters.

A further barrier would have been the group credit rating. In the past, structuring technology was ineffective in insulating the debtor book from the creditworthiness of the originator. In other words, the originator remained a dependent credit. Consequently, securitisation funding was really restricted to those firms that were rated A and higher. This has also changed with the advent of new rating and financing technologies, creating an effective legal and practical isolation of the debtor book from the parent company balance sheet — again without disrupting subsidiaries' local operations and customer relationships.

A securitisation of trade receivables will make sense for any CFO or treasurer currently concerned with reducing funding costs; diversifying funding sources to reduce their reliance on banks; and funding acquisitions.

The securitisation should be possible if:

  • there is an outstanding debtor book of euro 100 million or more in operating companies based in major western economies;

  • terms of trade mean that invoices are usually settled by payment rather than by credit note or return of goods.

    Critically, the new technology means that a transaction can still be completed even if the parent company is unrated. It allows companies to overcome obstacles such as having invoices spread over many operating companies, each with different systems, databases, customer lists and banking practices.

    One blue-chip firm has recently executed an invoice securitisation that is 400 basis points cheaper than the lowest financing offer currently available to it from the banking markets. Through this it is saving euro 5 million a year in financing costs, and the firm is rated BB+. The arrangement does not require any security to be given or any consent from existing bank lenders.

    (Edited extracts from Financial Management, a journal of CIMA, London.)

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