Financing: asset securitization done for software.

A staple in the credit card and mortgage industry for many years, asset securitization has finally come to the software business.

The transaction involves a $100 million securitization facility provided by Wachovia Securities through its commercial paper conduit, back-stopped with $5 million in subordinated debt provided by Comerica Bank. An additional $5 million in equity was provided by two venture funds, Voyager Capital and Odin Capital Group, and Windingo Partners, a private investment firm.

The movers behind the transaction were law firm Morrison & Foerster LLP and financial services provider Tideline Capital.

"This transaction sets a new precedent for the financing of business software, which increasingly is one of the most critical expenditures companies have to make," says William Veatch, the Morrison & Foerster partner who helped devise the software financing strategy for Tideline.

"Unlike conventional equipment, software typically cannot be remarketed, which means it has virtually no collateral value," Veatch explains. "Moreover, software often requires ongoing vendor support, making it extremely difficult to securitize software receivables. On top of that, intellectual property laws throw up a barrier to the resale of products repossessed in a foreclosure."

"Though the financial markets have an appetite for technology securities, there has not been an effective way for software companies to tap into the structured finance market," says Eric Wright, founder and CEO of San Francisco-based Tideline Capital. "This transaction, in which variable assets are bundled and financed as a single mass, has the promise of opening a huge financial pipeline for the software industry"--one he estimates could grow to a $200 billion market for software purchases.

Here's how the program works:

1. Tideline establishes a financing program as an outsourced partner for a software vendor.

2. If a customer of the vendor wants to finance its software purchase, Tideline provides all the necessary operating support services. The company helps the vendor negotiate, close and document its transactions, and ultimately provides financing to the customer.

3. Tideline places the receivable into a securitization-ready legal entity, allowing for the creation of a diversified portfolio with sufficient scale for the capital markets.

4. The portfolio is financed on a rolling basis through the issuance of asset-backed commercial paper, allowing the company to attract unlimited capital at attractive rates.

5. The net proceeds from the securitization are used to fund more transactions--repeating the process and assuring Tideline and its customers a consistent and reliable source of funding capacity.