Question by Johnny Question: SPE’s for securitization?
How do investors look at SPEs for the purpose of securitization of receivables? Should they be skeptical?
Best answer:
Answer by JoeyV
I’ll assume that you are in the US as I have no idea how this works in some other random country. I also assume that you mean the investor in the originating company, not an investor in a security based on the receivables.
In the US, the sale of receivables to the SPE must be a “true sale” pursuant to FASB 125. The rules on this are pretty strict and, unless there is reason to suspect the company is pretty dirty, I would generally regard it that way. This is significantly better than some off-balance sheet transfer that represents securitized lending and is some way of hiding debt.
I know this sort-of smells like Enron’s SPV’s or something, but I believe that most securitized receivables are just replacing traditional financing of receivables by a cheaper alternative and one that cleans up the balance sheet. Would you prefer that a company borrow short-term money by floating commercial paper, for instance, or securitizing their receivables? In the former instance, they have debt on the books that is probably higher on the capital pecking order than your investment and in the latter they have cash. Since the SPE is “bankruptcy-remote”, the securities issued by the SPE are likely to be more highly rated than the commercial paper so the cost to the company is probably less.
Skepticism is always good, but I think that you can be skeptically optimistic about this.
Know better? Leave your own answer in the comments!
