Academic journal article Duke Journal of Comparative & International Law

Whole Business Securitization in Emerging Markets

Academic journal article Duke Journal of Comparative & International Law

Whole Business Securitization in Emerging Markets

Article excerpt

I. INTRODUCTION

Whole business securitization, a transaction structure developed in England, has been used in Malaysia and is being considered for use in Hong Kong and Singapore. (1) How does the structure add value? The answer is not obvious. Whole business securitization is, as the name implies, securitization of the whole business. Why are the structuring expenditures over and above those that would be incurred in a simpler debt and equity structure worthwhile? How does the firm become more valuable when it is placed into a securitization structure? In a typical securitization, a pool of like receivables is securitized. There is at least the promise of economies of appraisal and management. Explaining why placing a whole business--not only the firm's receivables, but also its plant, property and equipment, intellectual property, and all of its other assets--into a securitization structure adds value is, at first blush, a daunting challenge.

In this essay, I propose an explanation. Whole business securitization adds value by minimizing bankruptcy costs. A group of creditors provides the firm's entire debt funding; the group agrees, at the time the financing is provided, on their respective rights and obligations should the firm encounter financial difficulties. The transaction structure effectively includes an intercreditor agreement governing the relationship of all of the firm's creditors. The squabbling on the eve of bankruptcy that bankruptcy systems seek to prevent occurs well beforehand, when parties' incentives are not as opposed as they become when the firm faces, or is in, bankruptcy.

The whole business transaction structure is only possible in jurisdictions in which secured creditor priority is respected absolutely. The jurisdictions at issue are the United Kingdom and emerging markets such as Singapore and Malaysia, which inherited bankruptcy systems from the United Kingdom. (2) In such jurisdictions, a secured creditor of all or substantially all of the assets of a company can control the company's insolvency. (3) The secured creditors thus have the ability and incentive to formulate, at the outset of their financing, an effective intercreditor agreement that will be respected should their debtor become bankrupt.

In sum, whole business securitization offers a combination of economies: economies of scale and scope, and transaction costs savings of various types. Some of the economies are those frequently discussed in the literature but available in different ways. (4) Other, more novel economies are made possible by features of the legal regimes in countries with English-style systems, features not contained in the U.S. legal system.

II. BRIEF HISTORY AND OVERVIEW OF SECURITIZATION

Securitization was developed in the United States in the 1970s. The structure contemplates the creation of a pool of cash flows; interests in the pool are sold to investors, and the proceeds are paid to the entity originating the cash flows. The first type of securitization transaction involved mortgages originated by banks. Since then, many other types of cash flows have been securitized, (5) and transaction volume is now sizeable. (6) Europe began using securitization in the 1980s, and it now has a sizeable transaction volume as well. (7)

In the late 1980s, emerging markets began using securitization. The first transaction was done by the Mexican telephone company TelMex. TelMex securitized its rights to receive payments from AT&T for the Mexican portion of telephone calls made to Mexico from the United States--that is, the portion taking place between the United States-Mexico border and the Mexican destination. In the securitization transaction, TelMex sold its rights to the payments from AT&T to a pool; the pool sold interests in the payments to investors, and paid to TelMex the amount it received from the investors. (8) As happened in the United States, subsequent securitization transactions have involved many different types of cash flows. …

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