Development Financing during a Crisis : Securitization of Future Receivables
Mexico's Telmex undertook the first future-flow securitization transaction in 1987. From then through 1999, the principal credit rating agencies rated more than 200 transactions totaling $47.3 billion. Studying several sources, the authors dra...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/04/5392498/development-financing-during-crisis-securitization-future-receivables http://hdl.handle.net/10986/19672 |
| Summary: | Mexico's Telmex undertook the first
future-flow securitization transaction in 1987. From then
through 1999, the principal credit rating agencies rated
more than 200 transactions totaling $47.3 billion. Studying
several sources, the authors draw conclusions about the
rationale for using this asset class, the size of its
unrealized potential, and the main constraints on its
growth. Typically the borrowing entity (the originator)
sells its future product (receivable) directly or indirectly
to an offshore special purpose vehicle (SPV), which issues
the debt instrument. Designated international customers make
their payments for the exports directly to an offshore
collection account managed by a trustee. The collection
agent makes principal and interest payments to investors and
pays the rest to the originator. This transaction structure
allows many investment-grade borrowers in developing
countries to pierce the sovereign credit ceiling and get
longer-term financing at significantly lower interest costs.
The investment-grade rating attracts a wider group of
investors. And establishing a credit history for the
borrower makes it easier for it to access capital markets
later, at lower costs. This asset class is attractive for
investors-especially buy-and-hold investors, such as
insurance companies-because of its good credit rating and
stellar performance in good and bad times. Defaults in this
asset class are rare, despite frequent liquidity crises in
developing countries. Latin American issuers (Argentina,
Brazil, Mexico, and Venezuela) dominate this market. Nearly
half the dollar amounts raised are backed by receivables on
oil and gas. Recent transactions have involved receivables
on credit cards, telephones, workers' remittances,
taxes, and exports. The potential for securing future
receivables is several times the current level ($10 billion
annually). The greatest potential lies outside Latin
America, in Eastern Europe and Central Asia (fuel and
mineral exports), the Middle East (oil), and South Asia
(remittances, credit card vouchers, and telephone
receivables). One constraint on growth is the paucity of
good collateral in developing countries. Crude oil may be
better collateral than refined petroleum. Agricultural
commodities are harder to securitize. Another constraint:
the dearth of high-quality issuers in developing countries.
Securitization deals are complex, with high preparation
costs and long lead times. The ideal candidates are
investment-grade entities (in terms of local currency) in
sub-investment-grade countries (in terms of foreign
currency). Establishing indigenous rating agencies can
slash out-of-pocket costs. Developing standardized templates
for certain types of securitizations might help. A master
trust arrangement can reduce constraints on size.
Multilateral institutions might consider providing seed
money and technical assistance for contingent private credit facilities. |
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