Say I'm looking at an entertainment company that has rights contracts with sponsors, broadcasters, etc. These contracts have fixed and variable components - the fixed components are predetermined annual payments listed in the contracts, and the variable components are based on viewership.
Would it be possible to securitize these contracts and, if so, what would that depend on? I'm assuming just the fixed component would be securitized? How important is the term of the contracts to investors in such specialty products? Do they have to be long, or really long, term? I'm guessing the default spread would be based on the creditworthiness of the contract counter parties? So if the counter parties have high corporate credit ratings, these will be cheaper than bank debt? That's my guess, at least.
Where would such securitizations fall in the debt structure and how would the other creditors feel about it? It seems like the cash streams would be pledged against the securitized product, which would affect the cash flows available to senior secured. How would banks view this in their credit analysis? Obviously it would still be viewed as debt, so it wouldn't allow them to extend their leverage, but I'm guessing it'll allow them to take a chunk of cheaper debt than if they did the whole thing with bank debt.
How expensive is this sort of thing to do? What's the process behind the securitization? Are there a variety of different methods or instruments these can be packaged into? Seems like it could be a good option, I just don't know enough about it.
Important key metrics: - Run-rate net cash flow - Stability of cash flows: contract length - long term preferred (relative to securitization note maturity), termination clauses, diversity of revenue streams etc. - Nature of asset (mission critical to operations) - Collateral (liquation value in a worst case scenario) - Borrower's credit rating
Pros: - Generally cheaper than bank debt
Cons: - More complicated. Each securitization is generally for a fairly unique asset base
Thanks! What kind of contract length is securitizable? 5 year? 10 year? Obviously longer term is better but I didn't know what the lower bound would be. Wouldn't the securitization note maturity just be the length of the contract/cash stream?
When you say diversity of revenue stream, what are you referring to? Are you talking about the company's revenue? What factor does that have?
If it's a stream of cash flows from a rights contract, what would the collateral be? You mean they'd have to pledge separate collateral? Wouldn't it just be a non-collateralized cash flow note? Wouldn't they just factor the receivables from the contract payments to an SPV that acts as the securitization mechanism, thereby insulating it from the company's credit risk?
Would the borrower's credit rating be the company securitizing the cash flows, or the payor of the fees to the company?
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