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Last Source for Financing?
Securitization is considered a financing option for most corporations. Even so, the general view is that this is not a preferred source of financing, because of the focus on securitization as a tool to overcome problems with low credit ratings. This means that most CFOs and treasurers tend to consider securitization only after other sources of financing are becoming difficult to obtain. Added to this, the interest rates paid are usually higher when the cost to set up the program is included, than what the corporation is usually paying for its base financing. This also goes to show why CFOs and treasurers tend to view securitization as their last option.
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Attractive Option:
However, if you were to change your focus from credit ratings and the interest cost into analyzing the effects of the balance sheet, the conclusion would be different. As a matter of fact, to many corporations securitization, is an attractive alternative! This conclusion is reached when focusing on shareholder-value. By using a value creation model to assess your company-value based on cash flow and capital tied in the balance sheet, interesting answers emerge. One obvious answer is that the negative effect from the interest net is much lower than the positive effect from reducing the balance sheet. Generally, an asset-producing, stable cash flow needs to be financed with a small portion of equity. And as we all probably know, equity is more expensive than debt. Therefore, there is an immediate effect shown as a lower WACC, which also affects the company-value. Other than that, positive aspects are a diversification of financing, improved key ratios and so on.
Obvious Alternative:
Naturally there are remaining drawbacks in securitization, one being the administrative workload involved in implementing a program. However, we believe this shouldn’t stop a treasurer or CFO from examining this method of financing more closely.
When summarizing the facts, securitization should be an obvious alternative to financing for any standard company with capital tied up in the balance sheet.
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