Flexible Capital Structure

Topics: Asset, Capital requirement, Balance sheet Pages: 5 (1281 words) Published: September 5, 2012
Spotlight on Structured Asset-backed Finance

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Spotlight on Structured Asset-backed Finance
Vasgen Edwards, Lloyds Bank Wholesale Banking & Markets - 15 Sep 2009 Corporate treasurers are waking up to the fact that the solution to their flexible funding requirements may be closer to home than they realised. Harnessing the power of the assets hidden on their own balance sheets can be the answer to their financing requirements.

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Increasing changes in the funding landscape mean treasurers are searching for additional prudent and sustainable funding sources, to add to their current funding mix. This is leading to a renewed interest in structured asset-backed financing solutions, designed to give treasurers the opportunity to rebalance and re-engineer their capital structures by offering well-priced, longer maturity alternatives. By securing a funding solution on the assets already owned by the company, or assets that will be essential to the business, it is possible to rebalance pricing models in a company’s favour, as these solutions allow treasurers to ‘pick and choose’ products most suited to their needs and the individual assets they have available. With deal sizes typically ranging from between £25m to £100m, these financing solutions have become a much more attractive option, giving companies the ability to unlock the value of their business’ fixed assets; obtaining assets for short- or long-term contracts and secure new assets with minimal outlay to preserve cash reserves. It is also often possible to secure these financing solutions much more quickly than other methods, by using an existing revolving credit facility (RCF) as a framework for the deal documentation. When it comes to explaining the new financing options to the board of a company, these solutions look like an RCF in terms of language and form, and will often use the framework of a pre-agreed credit facility, but have the added protection of being secured and amortising but are most often on longer terms and on occasion with balance sheet benefits. In terms of pricing, these solutions are also attractive. As the pricing is based on the corporate risk, as well as the asset risk, a corporate’s credit rating is part of the analysis of the structuring of the transaction. At the time of writing, there is a noticeable movement in market pricing in the BBB to AA range. In the case of the BBB credits, current 10-year bond pricing level is between 150-250bps compared to secured asset-backed lending facilities that are 5-15% less than these markers (dependent on the nature of assets financed). For the lender, asset-backed financing can be seen as ‘super-secured’. By taking a position on assets that are critical to the business, the lender can engender greater flexibility in its solution. At a time when banks are bound more tightly by regulation, this type of lending fits in well with the Basel II Framework, which describes a more comprehensive measure and minimum standard for capital adequacy. By securing a financing solution against a tangible asset, the bank is able to align the risk profile of the deal with the regulatory capital requirements outlined in Basel II. In contrast to traditional cash-flow-based bank loans, asset-backed financing relies both on the borrower's financial and operational performance and on the quality of the underlying collateral. It is designed to address immediate financing needs by allowing companies to monetise their balance sheets and accelerate their access to capital.

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