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Concerns to weigh in securitizations. (Business Briefs).

As credit markets have dried up, asset-based securitization 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.

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 -- 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 transaction, it may be necessary to underwrite 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.

"The bottom line is, don't securitize 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."
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Publication:Financial Executive
Article Type:Brief Article
Geographic Code:1USA
Date:Nov 1, 2002
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