Future-Flow Securitization Rating Methodology

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Report

Authors:
Donnelly, Christopher J.
Dadina, Rohinton B.
Morcom, Michael C.
Publication year:
1999

In a future-flow securitization, a company issues a debt instrument whose repayment of principal and interest to investors is secured by payments on future receivables the company expects to generate through its normal course of operation. The typical future-flow originator of the receivables has been an operationally strong company domiciled in an emerging market country. For sources of financing, such companies rely typically on bank loans or Eurobond debt. The pricing, term to maturity and, during periods of economic crisis or other market disruptions, overall availability of these internationally issued foreign currency-denominated debt instruments have, however, been constrained by concerns that the sovereign government will interfere with a company’s ability to make foreign currency payments to satisfy its debt obligations. The application of securitization techniques to a company’s future foreign receivables, though, helps to mitigate some sovereign risks and allows otherwise financially sound companies to access international capital markets at a lower cost of funds than would normally be available. In many cases, a futureflow securitization that encompasses strong legal and structural elements can achieve a rating that is above the sovereign ceiling otherwise applicable to foreign currency debt obligations issued directly by such company.

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