Evolving Species

Overview: The article asserts that Trade receivables securitization, which is still in its infancy compared with securitization of consumer debt, offers companies the opportunity to gain liquidity and reduce the cost of borrowing. A number of factors have fueled the explosion in asset securitization. Short- and medium-term liquidity is growing with the influx of funds into 401(k) and other retirement accounts and mutual funds. At the same time, government has moved from a deficit to a surplus position, taking bonds out of the market. The amount of high-quality paper available to meet this liquidity is evaporating. When finance executives meet with investment bankers to work out a receivables securitization program, they must consider a number of issues that are discussed in this article. Despite the advantages afforded by receivables securitization, finance executives need to address a number of issues before trying to put together a deal. The quality of the receivables to be securitized, their historical performance, dilution, concentration and degree of homogeneity will all affect how the underwriter ultimately values the deal. One of the means of enhancing the investment value of receivables is credit insurance. Insurance enables the migration to risk mitigation and credit enhancement. Issues of quality, concentration and even historical performance are resolved by a credit insurance policy that provides compensation for nonperforming receivables.

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Format: HTML | Date: Oct 2000 | Pages: 5