SECURITIZATION MADE MORE AFFORDABLE FOR DEALER FLEET FINANCING PROGRAMS

by MICHAEL GOETZ
Associate Editor, Canadian Autoworld
February 26, 2003

“New finance structure touted as cheaper, more advantageous alternative to funding of lease fleets”

The word “securitization” is certainly a mouthful, but one Canadian firm is nonetheless banking that it will soon be the talk of the auto lease industry in this country.

For dealers who wish to fund their own leasing arms. Corpfinance International Ltd. believes securitization is a cheaper and more advantageous method than traditional forms of financing normally offered by the banks, automaker credit arms, large independent leasing Companies, and other entities.

Pledging the Company’s assets as a guarantee against failure of loan repayments has long been an established and traditional method to obtain business capital.

Securitization is a relatively new form of that principle. It applies to a particular type of company asset - not bricks, mortar, equipment, or the like, but the cashflow of a discreet pool of receivables.

The receivables must be of a certain type; by their nature they convert into cash within a finite time period. They could be short term, such as 30-day trade receivables. or intermediate to long term, such as 48-month auto lease or loans.

In a securitization financing, the receivables are acquired by a trust, which then issues secured debt into the public market to fund the acquisition. By accessing publicly rated debt the borrowers plug into the “senior” debt market and its incumbent lower rates.

The automakers in Canada already extensively use securitization to provide funding for their large pools of conditional sales and lease contracts. The reason most businesses may not be aware of the process is that, due to the complex nature of the arrangements, the legal and administrative costs of setting up a securitization schedule restricted usage to only huge corporations that could afford the substantial “up front” costs.

“In the early clays it was not uncommon to spend a million dollars to set up a securitization structure” notes Kevin Andrews, a vice-president with Corpfinance (now president and CEO). “If a company such as Eatons or Canadian Tire wanted to securitize its receivables it might cost several millions.”

According to Andrews, a big development. and one particularly attractive to dealers. is that Corpfinance is now able to offer smaller companies access to the securitization process.

“For smaller operations, we can utilize already developed and paid-for documentation. That has brought the price per transaction down from a million to possibly as low as $20,000 to $25,000.

We have a standard documentation that call be amended and tailored to each customer. it’s very cost efficient”.

How small can you go? Andrews says dealers with lease portfolios of $10 million could easily enter the securitization market.

Corpfinance is certain that any securitization financing is cheaper than conventional lease financing.

“We fund with the market, with a spread reflecting the credit quality of the particular securitization,” notes Terry Wolff, (former) chief executive officer of Corpfinance. “The index is the yield on Government of Canada bonds. You can open the paper every day, check out the bond rate, factor in the spread, and determine your cost of financing for the term of the securitization.”

Corpfinance contends that, in addition to lower cost of funds, there are several other advantages to securitization. Since the process removes the asset and associated liabilities from the balance sheet, while still retaining CCA, it effectively “shrinks” the balance sheet. This in turn favourably effects tax scenarios and debt-to-equity ratios. The most fundamental positive aspect being that, with improved leverage, a leasing operation can grow its business without the need for additional equity.

Another benefit offered under Corpfinance’s securitization structure is the ability to finance any make or model of vehicle. as well as used vehicles.

And, finally, Terry Wolff offers one more positive aspect of securitization: “Other providers may want to take over the lease and service your customer. We are not in the retail leasing business and never intend to be. We are a wholesale operation.”

The dealer maintains the direct relationship with his customer “and never loses control of that customer.