Usage of Credit Securitization on Verge of Explosion

Article excerpt

When automobile loans and computer lease receivables were first packaged and sold as securities in the spring of 1985, the breakthrough in finance made ``securitization'' a new buzzword in the financial markets.

Over the past three years the market for publicly sold issues of asset-backed securities (excluding mortgages) has grown to $27.7 billion. Many analysts expect that this is only the tip of the iceberg and that many novel uses of the idea lie ahead.

Analysts at McKinsey & Co. have concluded in a newly published book, ``Securitization of Credit,'' that the asset-backed market is on the verge of ``several years of explosive expansion.''

The authors, James A. Rosenthal and Juan M. Ocampo, said that in an era of hostile takeovers and emphasis on return on shareholder equity, the advantages of selling assets through securities offerings are too great to be ignored:

``We expect more and more companies to be driven to inceased usage of credit securitization as one of their fundamental tools to boost returns on equity against unwanted takeover attempts.''

The basic idea is that companies sell assets to a special-purpose financing affiliate, which in turn sells notes backed by those assets to the public. Payments on the assets are used to make principal and interest payments on the securities.

The essential advantage of selling assets is that they can be packaged into high-quality securities that carry low interest rates - lower, in fact, than rates the company must pay on its own debt. In addition, selling assets leaves more capital available for uses like acquisitions or expansion of a company's core busines.

So far, the asset-backed securities have been sold almost exclusively to institutional investors. Because securities firms' gross underwriting spread has been only about $4 per $1,000, there is not enough of a sales commission to attract the retail brokers who sell to individuals.

Thomas E. Capasse, vice president at Merrill Lynch Capital Markets, said, ``Asset-backed financings are going to become a big factor in the L.B.O. business, helping reduce the reliance on junk bonds.'' Interest rates on junk bonds are substantially higher than the rates paid on assets packaged into securities.

Walid Chamma, director at First Boston, the leading firm in asset-backed securities, said more bankers are recognizing the benefits of asset sales.

``With the new capital adequacy guidelines set by the central banks, you will see a lot of banks selling consumer loan assets," he said. "It is a very efficient way of releasing capital.''

At the same time, investment bankers are becoming more adept at designing the new issues. …