Japan embraces whole business securitisations

Japanese companies are starting to embrace whole business securitisations.

The schemes are ferociously complicated, expensive to set up and restrict management’s ability to make its own decisions. But whole business or corporate securitisation is not quite the nightmare capital market product it sounds.

It can allow entities to borrow more – and more cheaply – and may leave them with more flexibility to deploy spare cash.

In December, Softbank, the Japanese communications conglomerate, put in place a Y1,442bn ($12bn) securitisation, described by analysts as the biggest in the world, backed by the cash flows of the mobile phone business it had bought from Vodafone.

Other Japanese companies noticed the deal.

“Its gigantic size attracted people’s attention to whole-business securitisation; even ordinary people in the financial industry,” says Masahiro Shidachi, structured finance analyst at Standard & Poor’s.

The latest corporate securitisations elsewhere in the world include a series of deals by US restaurant chains, where branded franchise cash flows lend themselves to the technique.

It involves the securitisation of the entire business of a company, or of a specified part of it. Assets and cash flows are ring-fenced within one or more special purpose vehicles that issue bonds backed by the cash flows and assets they control.

In Japan, S&P has rated only about 10 whole business securitisations since the first in late 2005. However, it says it has talked to 10 more companies about potential ratings.

Yukio Egawa, Japan head of securitisation research at Deutsche Securities, says the financing technique is appropriate for utilities, power generators, docks, toll roads and even stock exchanges. Such companies generate the strong, reliable cash flows necessary to support a securitisation.

Analysts say the technique also appeals to companies perhaps unable to raise finance any other way. This may explain why many Japanese deals have involved pachinko parlour operators.

The effort involved in this structuring can be rewarded with a credit rating “three to six notches higher” than the same company could achieve with traditional corporate bonds, says Mr Egawa.

But there are obstacles. Such structuring imposes more constraints on business decision-making than traditional corporate debt, but is more flexible than most other kinds of securitisation – for one thing, investors in corporate securitisations take an element of business risk.

But in return, investors benefit from many safeguards, such as debt service cover and other financial measures. If key thresholds are breached, investors can take control of the business.

Another problem is the cost of setup. Such securitisations “cannot be standardised”, says Takahiro Tazaki, securitisation analyst at Barclays Capital. “Each company’s cashflow, accounting and tax is different, every point has to be considered.” This makes fees high – putting off many smaller companies.

However, Mr Tazaki says the high up-front costs can be swallowed by larger companies, making securitisations worthwhile.

The pachinko industry is beset by a declining customer base, legal problems imposed by a government that disapproves of gambling, and alleged dealings with shady organisations.

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