U.S. Operating-Asset or Whole-Business Securitization

Abstract

In the past several years, a new variant of structured finance transactions has been developed that has the promise of growing into a major new area of finance. Variously labeled “whole-business” or “operating-asset” securitization, this new financing technique straddles a broad area between traditional corporate finance and structured finance. Transactions in this asset class have been focused primarily in the intellectual property arena, including fast food, licensing, music, and film and drug royalties. More recently, a broader area of transactions including leased containers and timber have been securitized using newly created whole-business or operating-asset techniques. Among the advantages of this new form of finance are attractive economic terms and less restrictive covenants than generally found in bank financings and high-yield bond deals. Since these deals involve the transfer of an ongoing business instead of passive assets like mortgages and credit cards, the role of the issuer is crucial. In virtually all of the relevant transactions to date, the issuer has retained the sponsor as the servicer or manager of the assets after they have been deposited into the issuer. Probably the most significant legal challenges accompanying whole-business securitizations or securitizations of operating assets are bankruptcy related. Because of the operating nature of the issuer and its affiliates after the completion of the securitization, these transactions have been alleged to have a heightened risk of substantive consolidation.