Securitizations is the method by which companies take
illiquid assets, in this case receivables, turn them into marketable
securities, and sell them to a third party for cash. The receivables and
associated debt are transferred to an off-balance sheet subsidiary. The
originating company, in most cases, continues to collect the receivables and
forwards the interest and principle payments, when collected, to the buyers
(usually insurance companies or banks). Some of the newer type structures
allow for additional receivables to be added to the credit facility as sales
Investors should be concerned with these structures.
If the receivables go bad, beyond the built-in credit enhancements in the
deal, who is really responsible for the losses?
Over the years, securitizations (asset backed
securities) have become very complicated and unwieldy. Equity and debt
investors alike, therefore, should be prudent and cautious when dealing with
are interwoven with a company’s cash flow, a mission critical function that
has a direct result on shareholders’ equity and the stock price.