SECURITIZATION OF RECEIVABLES EBOOK!
Receivables securitization is a well-established funding method whereby assets such as trade receivables, credit card receivables, or other. A larger organization can convert its accounts receivable into cash at once by securitizing the receivables. A securitization can result in an extremely low interest rate for the issuing entity, since the securities are backed by a liquid form of collateral (i.e., receivables). Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which.
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Improve Capital Efficiency A fundamental benefit of securitization is that it allows a company to monetize a low-yielding, yet significant balance sheet asset — accounts receivable — and deploy the resultant proceeds to a higher yielding corporate priority.
Regardless of whether the capital is reinvested in the business or repatriated to debt or equity holders, return on capital is improved. Accounts receivable, as an asset on the balance sheet yield, as a best case, zero. Therefore, with receivables securitization of receivables zero, the remaining productive assets of the company must, in aggregate, return more than the cost of capital in order for a company to meet its overall return on capital targets.
So, when accounts receivable are monetized through securitization, one low yielding asset is replaced with another one: This action, by itself, does little to improve capital efficiency.
Where this can become interesting, though, is when the cash is either redeployed or repatriated. If it is redeployed in a corporate investment that yields the securitization of receivables of capital, the net effect will be that the capital employed in the business will have remained constant, but the absolute returns will increase as a result of zero-yielding accounts receivable being replaced by a cost of capital-yielding investment.
Overall, the return on capital increases. If the proceeds of securitization are not reinvested but are in fact used to reduce the capital employed in the business, return on capital will also increase.
The reason for this is simply that the company has securitization of receivables all of its productive assets and simply monetized its non-productive assets — accounts receivable.
Enhance Liquidity Because securitization programmes can often provide a superior advance rate compared to credit facilities, companies with a relatively securitization of receivables volume of receivables can use securitization to enhance their overall liquidity.
High growth companies, distributors, seasonal businesses and service companies generally all require significant working capital investments and their credit facilities often lag the growth in their businesses.
The Securitization of Accounts Receivable |
However, by securitizing receivables, the companies can achieve maximum liquidity for their receivables and then look to credit facilities to address any incremental liquidity requirements.
It is true that when a company securitization of receivables its receivables it may see its availability of credit decline — since there are now fewer assets available to support the credit facility — but securitization of receivables any reduction in the credit facility would be more than offset by the increased liquidity provided by the securitization programme.
Purpose Companies sell off their receivables, through securitization or other means, for several reasons. It allows them to get cash immediately, instead of waiting for customers to pay.
It also isolates them from the risk of nonpayment. In every batch of receivables, there are usually some customers who never pay. When it sells the receivables, the securitization of receivables passes that risk on to the investors.
Securitization offers one other benefit: And there is a market for every type of loan. So that type of security may fit into a portfolio securitization of receivables is focused on generating short-term income. Of course, securitization was also involved in one of the worst crashes in history.
Receivables Securitization and Capital Structure
In a typical master trust transaction, an originator of credit card receivables transfers a pool of those receivables to the trust and then the trust issues securities backed by these securitization of receivables.
Often there will be many tranched securities issued by the trust all based on one set of receivables.
After this transaction, typically the originator would continue to service the receivables, in this case the credit cards.
There are various risks involved with master trusts specifically.
One risk securitization of receivables that timing of cash flows promised to investors might be different from timing of payments on the receivables. For example, credit card-backed securities can have maturities of up to 10 years, but credit card-backed receivables usually pay off much more quickly.
To solve this issue these securities typically have a revolving period, an accumulation period, and an amortization period. All three of these periods are based on historical experience of the securitization of receivables. During the revolving period, principal payments received on the credit card balances are used to purchase additional receivables.