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Corporate securitisation set to take off Back  
As Jefferson Smurfit prepares to launch the first Irish corporate securitisation transaction, FINANCE takes a look at a recent report published by Demica, which examines the changing perception of corporates towards ‘trade receivables securitisation’. It identifies the historical burdens associated with securitisation and the market drivers that are eroding these perceptions. The report also examines predicted growth rates and the rising enthusiasm amongst European Corporates for invoice securitisation.
Key findings
• Almost a fifth of top European corporates have to date conducted a securitisation.
• Invoices (trade receivables) are the most popular asset for corporate securitisation.
• Access to alternative lines of credit is perceived to be a more important driver for a securitisation than reduction of interest costs.
• Companies no longer believe that invoice (trade receivables) securitisation is only for the largest corporates.
• Invoice securitisation growth is expected to accelerate to the end of 2005.
• Corporates are concerned about the perceived administrative burden of securitisation and maintenance, indicating a need for greater awareness of proven ‘securitisation processing models’.

Attitudes to asset backed finance
Corporations large and small have been eagerly seeking alternative, less costly lines of working capital finance. Securitisation of corporate assets, which enables better-rated asset-backed finance to be raised from the capital markets, has appeared onto the radar of most financial managers. Two factors however decelerated the take-up of the securitisation option. The first of these factors was the well-publicised abuse of Special Purpose Vehicles (SPVs) in recent accounting scandals, where certain mechanics of securitisation were used to reengineer the balance sheet, rather than ‘true financing’. Secondly was the perception of securitisation as complex, costly and the fact that it would tie up intolerable amounts of processing time for internal financial teams, already under pressure from current or impending financial regulatory compliance.

Despite these two perceived ‘problems’, securitisation is, in fact, growing steadily. Statistics from the European Securitisation Forum show that the European securitisation market is expected to grow by 19 per cent in 2004. Evidently, corporate financial managers are overcoming their uncertainties and discovering securitisation solutions/models that are not so burdensome.

Advantages and disadvantages
Emphasising the extent of the credit squeeze that European corporates have been experiencing, our survey found that ‘access tofinance form a source other than your relationship banks’ achieved an even greater importance score (64.7 per cent) amongst senior financial managers than ‘access to cheaper finance’ (57.7 per cent). In other words, while a prime objective of invoice securitisation is evidently to reduce interest cost, widening the range of credit lines available was even more important. In line with our observations above on the credit rating issue, ‘separation of the asset from the corporate credit rating’ was deemed the third most important advantage of invoice securitisation (55.1 per cent) according to our respondents.

Our research also tested the level of the perceived negatives of invoice securitisation amongst corporate financial managers. Overwhelmingly in the lead were ‘expensive and time consuming to set up and administer’ (74.3 per cent) and ‘time consuming’ (68.3 per cent). This perception in itself is intriguing, given the number of well-publicised cases in the UK and Germany where the only pressure on the internal finance team was to deliver a daily text .le of the sales ledger. The authors of this report surmise that the combination of compliance with new financial regulations, plus concerns over increasing interest cover, are so time consuming for financial managers, that they have little time to actively seek alternative lines of credit. Therefore both vendors and the corporates own industry associations bear a considerable responsibility to make companies more aware of the various alternative working capital solutions (including invoice securitisation) available. Nevertheless, our research did reveal that the notion that ‘securitisation only applies to large corporates’ is already on the decline a positive sign that former perceptions are changing.

The future
Invoice securitisation is set to grow substantially over the next two years. Just over a third of our respondents saw growth rates increasing, two-fifths thought they would hold at current levels, and only a fifth saw any deceleration. Interestingly, a number of our respondents who had already conducted an invoice securitisation reported that they had stopped some way short of securitising the whole of their eligible book, choosing to retain the flexibility to increase this line of finance in the future in some cases by up to 50 per cent. Whilst suggesting that financial regulation may be taking up much of the financial manager’s attention, our respondents firmly told us that there was no causal link between compliance and securitisation growth. This remains firmly the province of reducing interest cost and widening the lines of credit available to a company.

This report strongly highlights the growing enthusiasm amongst European corporates for invoice securitisation, employed as a true funding tool rather than balance sheet engineering. Market drivers of securitisation are various, ranging from sheer debt burden, to market downturn, to realising value from LBOs. Finally, it is just as important for the corporates to increase their lines of credit, as it is to reduce their overall cost of borrowing.

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