Accounts Receivable Securitization

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Accounts Receivable Securitization

Accounts receivable securitization is a viable option for a large company, since it can achieve one of the lowest interest rates available for debt. To do so, it creates a special purpose entity (SPE) and transfers a selection of its receivables into the SPE. The SPE then sells the receivables to a bank conduit, which in turn pools the receivables that it has bought from multiple companies, and uses the cash flows from the receivables to back the issuance of commercial paper to investors, who in turn are repaid with the cash flows from the receivables.

Accounts receivable securitization is clearly a complex process to initially create; the primary benefit of doing so is that a company’s receivables are isolated from the company’s other risks, so that the SPE has a higher credit rating than the company, with an attendant decline in borrowing costs. To achieve the AAA credit rating typically needed for accounts receivable securitization, a credit rating agency will review the performance record of receivables previously included in the pool, debtor concentrations in the pool, and the company’s credit and collection policies.

A lesser reason for using accounts receivable securitization is that a company is not required to record it as debt on its balance sheet. However, this sometimes leads to an outcry from the investing community that a company is hiding liabilities, so companies sometimes voluntarily record the transaction as debt on their balance sheets.

A key factor in preserving the stellar credit rating of the SPE is to maintain an adequate degree of separation between the company and the SPE. To do so, the transfer of receivables is supposed to be a nonrecourse sale, so that the company’s creditors cannot claim the assets of the SPE if the company goes bankrupt. This means that there should be no mechanism by which the company can regain control of any receivables shifted to the SPE.

Accounts receivable securitization is only available to large companies having a broad customer base whose receivables experience minimal defaults. Further, there must be adequate tracking systems in place to monitor the creditworthiness of those debtors whose receivables are included in the SPE, delinquency statistics, and customer concentrations, as well as frequent reporting on receivable collections.