Concerns to weigh in securitizations. (Business Briefs).As credit markets have dried up, asset-based securitization Securitization The process of creating a financial instrument by combining other financial assets and then marketing them to investors. Notes: Mortgage backed securities are a perfect example of securitization. May also be spelled as "securitisation. has re-emerged as a low-cost alternative to traditional financing and an attractive short-term remedy for CFOs seeking to improve cash flow without pressuring customers. At the same time, however, securitization -- as an off-balancesheet borrowing facility -- is coming under increased scrutiny by investors and regulators in the wake of recent accounting scandals Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. . So, does securitization still make sense? It may, but there are a number of concerns that issuers need to keep in mind, says Lloyd Gold, account director at REL Consultancy Group. These include: * The barrage of downgraded credit ratings. The lower an issuer's credit, the more attractive that firm must make the issue, which raises interest costs and reduces returns to shareholders. * The regulatory focus on specialpurpose entities (SPEs) is likely to lead, at best, to greater reporting requirements for banks, says Gold. At worst, it will cause asset consolidation within their balance sheets. This, in turn, will either raise issuer costs or hurt liquidity as banks pull back from this sector. * Increasing scrutiny and suspicion by investors paying more attention to off-balance-sheet financings Off-Balance-Sheet Financing A way of raising money that does not appear on the balance sheet. Notes: This is unlike loans, debt and equity, which do appear on the balance sheet. -- and potentially less interest in this type of asset. * "Hidden" costs to a securitization, including bank fees, interest costs and insurance. For instance, because an issuer typically supplies 20 to 30 percent collateral in securitized securitized Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds. transaction, it may be necessary to underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. the issue with insurance. If collections are handled internally, the issuer must pay to have that process audited. If collections are outsourced, there are transaction costs Transaction Costs Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price they can sell it). . "The bottom line is, don't securitize Securitize The practice of a company selling accounts receivables or other debts owed to it. The third party that buys the debt assumes ownership of it and the responsibility for collecting the debts, and keeps the repayments when made. unless you are absolutely sure you are minimizing your working capital," says Gold. "Many companies take the plunge prematurely, and overlook the cash flow potential trapped in their balance sheets." |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion