Companies from a wide array of industries are securitizing their assets. Essentially the companies are mortgaging themselves to achieve investment-grade debt ratings. This is reminiscent of similar behavior just before the Great Recession. Claire Boston reports for Bloomberg:
As borrowing costs plunge for the highest-quality companies, there’s a growing incentive for riskier businesses like fast-food chains to mortgage virtually all their assets.
Franchised companies like burger restaurant Jack in the Box Inc. and massage provider Massage Envy are increasingly selling unusual bonds backed by most of their business. By pledging key assets like royalties, fees, and intellectual property to bondholders, companies can win investment-grade credit ratings on their debt and slash their financing costs, making their bonds higher quality even if their overall companies are still relatively risky.
This year borrowers have sold more than $6.9 billion of these securities, known as whole-business securitizations, approaching the most on record, according to data compiled by Bloomberg. Fast-food restaurants used to be the main issuers of this debt, but a wider array of companies are jumping in. This year, in addition to Massage Envy, a group of preschools and a distributor of music royalties have sold the bonds.
“The sector is growing very fast,” said Tracy Chen, who invests in whole-business bonds as head of structured products at $75 billion asset manager Brandywine Global. “You can almost securitize anything.”
Companies are being nudged toward this kind of financing by bond investors that are gravitating toward relatively safe securities and away from the riskiest debt in the junk-bond market. They’re looking for an elusive combination of safety and strong returns in a world that has more than $16 trillion of negative-yielding debt. That’s translating to material savings for corporations that can shift from high-yield borrowings to investment grade.
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