Can you elaborate on how a securitization works?
Say a company maintains a large pool of accounts receivable. The cash due from these receivables may not be available for 30 days or more, but securitization allows the company to receive financing immediately. The interest cost is relatively low because the receivables’ cash flows are legally segregated and protected from other creditors in the event of a bankruptcy.
This legal separation of the receivables has no impact on the company’s operations; the business will continue to manage its accounts receivable (and customers) in the same manner as it did before the securitization. However, the proceeds from the securitization can be used to originate more assets, to reduce outstanding debt with higher interest costs or to provide for other capital needs.
What types of accounts receivable can be securitized?
Securitization of trade receivables is common in many industries, including metals, mining, energy, distribution and manufacturing. Generally, any diverse pool of accounts receivable can be securitized. Eligibility criteria generally require that the receivables not be delinquent, not be subject to offset, be fully earned with no future performance required by the company and not be due from an affiliate of the company or the federal government.
How can a company decide if securitization makes sense for it?
Securitization may be a source of financing if a company maintains total domestic receivables of $50 million or more. Through innovative structuring, securitization provides many middle-market companies with direct access to the capital markets. Middle market companies across a wide spectrum of industries have unlocked the value of their assets and obtained the necessary capital to support their current operations and future growth through securitization.
This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transitions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant, or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. PNC Capital Markets LLC, a registered broker-dealer, is a member of SIPC and FINRA.
©2010 The PNC Financial Services Group. All rights reserved.
Mark Falcione is managing director of PNC Capital Markets LLC. Reach him at (412) 762-7325 or [email protected].
