Whole business securitization is way that companies can raise capital that they need to remain operational. Securitization refers to the process where a corporate entity takes certain assets and converts them into securities that it can offer for sale.
Example of Securitization
A good example of securitization is that of mortgage-backed securities. Banks issue mortgages in the usual manner, and the properties themselves are used as security for the loans. Several mortgages are put together into a mortgage pool. The funds in the pool are held in trust and act as collateral for the mortgage backed securities.
The mortgage backed securities may be issued by the bank that originally granted the mortgages or an investment banking firm. Fannie Mae and Freddie Mac also issue mortgage backed securities.
The securities can be sold to buyers in the secondary mortgage market. Since the mortgages are divided into various parts, there are different levels of risk available in mortgage backed securities to buyers. Pension funds are a typical buyer of mortgage backed securities.
Other financial vehicles that can be used for securitization include media revenues, royalties, healthcare receivables, and credit card receivables.
What is Whole Business Securitization?
In a whole business securitization situation, the income stream of a department or the company as a whole are used. This option is more complicated than a traditional securitization, which focuses on a specific pool of assets only.
An investor who is participating in a whole business securitization needs to understand that the company must be allowed to continue to operate. Management must have a certain amount of flexibility so that the business avoids cash flow issues and is able to function properly. A company adopting the whole business securitization approach will probably not be able to maintain a Triple A rating from corporate rating companies.
Advantages of Whole Business Securitization
Whole business securitization offers a number of advantages to a company:
- The company doesn't have to sell the assets that are being used as part of a a securitized vehicle. That way, it retains control of them at all times.
- This option is an attractive choice for companies that have items of value they can put up for a securitization that don't show up on the company balance sheets. Examples of these assets are brands and other forms of intellectual property.
- Funds can be raised by the company through the capital markets. Taking this step allows the company to get funding from a larger pool of potential investors that it wouldn't necessarily have access to.
- A whole business securitization lets the company structure the financial vehicle in a way that will improve its credit rating.
When a Whole Business Securitization Makes Sense
For companies that have generate a stable level of income at a predictable rate, a whole business securitization may be the right choice. The company considering this strategy will need to have a sizable market share. Industries that are highly regulated where the level of competition isn't likely to increase in the near future are good ones for this method of raising capital.
Whole business securitization is a way for companies to raise much-needed funds. This strategy isn't right for all corporations, but it can be successfully used in certain situations to keep cash coming into the company.