This decoupling is typically achieved by establishing a bankruptcy-remote special purpose entity (the “securitization SPE”) that neither provides, nor relies on, credit support to or from its non-SPE affiliates. By utilizing common securitization credit-enhancing techniques to decouple the rating of the asset-based financing from that of the operating company and restricted subsidiaries that would constitute the borrower group under a more traditional cash-flow loan, it is possible to achieve a ratings lift and other potential benefits that overall reduce the borrowing cost while expanding the universe of potential lenders. A prudent mix of asset-based and cash-flow borrowing therefor has the potential for unlocking additional access to financing. A borrower may therefore be able to obtain significant additional borrowing capacity from various assets that cash-flow lenders do not give much value or where the asset-based financing does not have any particularly adverse impact on the borrower’s EBITDA or, by extension, the borrowing capacity under cash-flow loans. In contrast, asset-based lenders primarily look to the cash-flow associated with particular assets and the liquidation value of such assets as providing the basis for the amount of financing that such lender will be willing to provide against such assets. As such, cash-flow lenders will also generally have a greater tolerance, and even preference, for maintaining a security interest in core assets of the borrower that are not likely to be sold during a restructuring. Provided that the collateral securing the cash-flow loan has sufficient value for the lenders to remain fully secured in case of insolvency proceedings, they will likely view any additional collateral as essentially a form for boot collateral: nice to have, but not particularly additive to the company’s borrowing capacity. Chapter 11 or equivalent insolvency proceedings). So long as the company retains sufficient enterprise value that the company is likely to restructure (and not liquidate) in case of any insolvency, cash-flow lenders primarily look to the protection afforded to secured lenders in a bankruptcy restructuring (i.e. As such, operating companies should consider including securitization structures as part of their capital structure.Ĭash-flow loans, even if secured, primarily look to a borrower’s EBITDA and enterprise value. Securitizations also have the potential for achieving a better regulatory treatment and a higher rating differential compared to the corporate credit rating, compared to more traditional secured financing arrangements. Securitization techniques may also be used to capture other benefits such as tailoring the financing to desired credit ratings, reducing lenders’ regulatory capital charges or achieving particular treatments for tax or accounting purposes.Īsset-based lending in general, and securitization in particular, provides corporate borrowers with borrowing capacity against assets that, from a pure cash-flow-based lending perspective, may have limited to no borrowing value. Utilizing these types of structured financing arrangements enables companies to diversify their lender base, increase their borrowing capacity, and even lower their financing costs. Companies are increasingly incorporating securitizations and securitization-like financing arrangements as part of their capital structure.
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