Academic journal article Journal of Global Business and Technology

Defining the 3-D Securitization Space of Future Export Receivables from Emerging Markets

Academic journal article Journal of Global Business and Technology

Defining the 3-D Securitization Space of Future Export Receivables from Emerging Markets

Article excerpt

ABSTRACT

The purpose of this paper is to develop a model that defines the optimal "securitization space" for firms located in emerging markets. The 3-D "securitization space" is determined by the sovereign ceiling, the number of notches above sovereign ceiling achieved on the securitization of the future export receivable, and the corresponding cost of securitization vs. the reduction in basis points above Treasury, when piercing sovereign ceiling. We show the case of Pemex Finance, leaving the "securitization space" due to Mexico's rating upgraded, whilst PVDSA Finance leaving the "securitization space" because of Venezuela's rating being downgraded.

INTRODUCTION

A company located in an emerging market country with foreign currency export revenues, can securitize these revenues, and achieve a rating above its sovereign ceiling. The company can raise capital at a lower cost of funding by securitizing its expected future export receivables in the currency of a highly rated jurisdiction (hard currency), instead of issuing unsecured debts in i.e. $US or Euros. The rating of the unsecured debt in a hard currency, issued by the firm, is constrained by the sovereign rating. Via securitization the issuer can break through sovereign credit ceilings and gain access to lower cost of capital. Rating agencies assign long and short-term ratings to foreign currency debt issued by sovereign governments. Credit ratings reflect the sovereign's ability and willingness to satisfy the terms of its foreign currency debt. When analyzing emerging market economies, the credit rating assigned to a sovereign's foreign currency debt tends to be the upper boundary for credit ratings given to the foreign currency debt issued by public authorities and private enterprises that are under the sovereign's domain. Insulation from exchange controls and currency restrictions typically requires that the exporter build a funding structure that traps future export receivables and the proceeds from their liquidation in a jurisdiction where an offshore special purpose company can grant and defend a security interest in the receivables to investors or to a trustee on behalf of the investors. A firm's local currency ratings will be at least as high as its foreign currency rating because the risk measured by the rating agency is net of the elements which compose sovereign risk. Local currency ratings indicate a firm's ability to service its debt given the quality of its management, operational risk, financial structure and exposure to market forces. Financial structures that have been employed by public entities and private firms to issue foreign currency debt with ratings higher than the rating on foreign currency debt issued by the sovereign vary in financial and legal design but have some fundamental features that are common. At the core of each structure is an offshore special purpose vehicle that takes the place of the original company as creditor to importers/obligors. Importers are directed to pay for goods and services to an offshore account that is the source of debt service for the securities issued to capitalize the company's future stream of exports. Direction to pay for imports to the offshore account (notification), requires binding acknowledgment from the importer (see appendix for structure). These transactions are referred to as "future-flow securitizations. Future-flow securitizations essentially relocate part of a firm's export business to a jurisdiction that is insulated from the currency convertibility facets of sovereign risk. The principle feature that distinguishes a "future flow" securitization from a securitization of future receivables is that in the former, receivables are sold before they exist while in the latter all receivables created from designated accounts will be sold over a future period as they are created. In a future flow securitization the credit performance of the securities depends on the ability of the originator to continue to produce and sell products and services. …

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