As macroeconomic headwinds continue to swirl, healthcare organizations face challenges as they look for ways to mitigate risks and manage costs. Given rising interest rates and tightening credit markets, companies across the pharma & life sciences spectrum should consider an accounts receivable securitization (“securitization”) as part of any debt capitalization. Securitizations can be deployed into a broad range of capital structures and may be complementary to most pro rata credit facilities, institutional term loans and bonds.
PNC’s Securitization Expertise with Pharma & Life Sciences (PLS) Companies
PNC’s Pharmaceuticals and Life Sciences team is focused on providing dynamic and tailored financing and banking solutions. A key product often considered is a securitization. PNC's team has executed securitizations across virtually every segment of the healthcare industry, including:
- Contract development and manufacturing organizations (CDMOs)
- Contract research organizations (CROs)
- Clinical labs
- Medical devices, instruments, and supplies
- Pharma distribution
- Pharmaceutical manufacturers
- Diagnostics and tools manufacturers
- Hospital systems
- Healthcare services
What Is an Accounts Receivable Securitization?
An accounts receivable securitization is a committed capital facility used to finance or monetize a company’s accounts receivable portfolio. This financial application is designed to efficiently leverage the value of a company’s accounts receivable portfolio into a low-cost, committed financing platform, which is customized to meet the unique needs of each company.
Securitizations are typically utilized by large corporations, with annual revenue greater than $1 billion, across diverse industries, including healthcare, and to borrowers with both investment grade and noninvestment grade credit profiles. A securitization is often used in conjunction with other types of corporate debt, including a revolving credit facility.
A securitization is structured whereby the receivables and related cash flows are legally owned by a company’s wholly owned, limited purpose subsidiary, which through legal analysis and opinions, provides for such subsidiary to be a bankruptcy-remote entity. The combination of the legal structure, some form of credit enhancement (e.g., over-collateralization of receivables and subordination), and diverse cash flows from the discrete receivable portfolio, allow for securitization lenders and investors to provide a committed facility to support the underlying operating company and its parent company.
A securitization structure is also revolving, so new receivables generated are continually providing financing value. The operating company continues to manage its customers and receivables in the same manner as it did before the securitization. Such continued servicing control, including no notification to the company’s customers, may be a more favorable arrangement than other accounts receivable financing solutions in the market, such as traditional factoring.
Benefits of an Accounts Receivable Securitization
Accounts receivable securitizations can help a company achieve its strategic objectives with respect to expense savings, cash flow improvement and reported leverage reduction. Securitizations often offer attractive interest rates, typically delivering interest rate savings relative to other sources of committed financing. It can also be used for balance sheet improvement, such as working capital and leverage ratios, when accounted for as a sales or monetization program.
Securitizations allow for flexible use of proceeds for any corporate purpose, including:
- Refinancing more expensive debt, including term loan A, term loan B, bonds, and mezzanine debt. When proceeds are used to repay outstanding balances on a revolving credit facility, a company’s liquidity position improves
- More efficiently funding short-term and permanent working capital
- Funding acquisitions or capital expenditures
- Funding a dividend or a share repurchase
In the healthcare sector, securitization is most frequently used to repay more expensive debt and more efficiently fund permanent working capital.
We had [recently] gone public, and we were looking at ways to optimize our capital structure and reduce interest expense. PNC recommended adding an accounts receivables securitization to our capital structure and using the proceeds to refinance a portion of our senior notes. PNC’s experience with this type of transaction led us to engage PNC.
—CFO of CRO
We've had an accounts receivable securitization program for over 15 years with PNC Bank. We view it as a permanent and efficient component of our capital structure, which complements our bank credit facilities and the public notes which we have issued.
—Vice President of Investor Relations and Treasurer of medical device company
Is a Securitization Right for Your Business?
Questions to ask yourself to determine if an accounts receivable securitization is right for your business can include:
- Does your company consistently have more than $100 million in domestically originated accounts receivables (net of contractual allowances and deferrals)?
- Does your company have a corporate credit rating of at least B3 by Moody’s or B- by S&P (or the equivalent)?
- Does your company have a need for core funded debt or letter of credit issuance?
- Does your company’s credit agreement permit a securitization, receivables purchase facility, receivables monetization, or factoring arrangement? If not, do other provisions and baskets, typically with the negative covenants, allow for a securitization or can the matter be negotiated?
- Does your company’s accounts receivable pool consist of a well-diversified group of customers?
For more information on how our corporate banking experience in the Pharmaceuticals and Life Sciences industry can help move your business forward, click here or contact your relationship manager.