PRA had just 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 PRA’s senior notes. PNC’s experience with this type of transaction led to PRA engaging PNC.
—Mike Bonello, CFO, PRA Health Sciences, Inc.
What is an Accounts Receivable Securitization?
An accounts receivable securitization is a committed capital option used to finance or monetize a company’s accounts receivable portfolio. The product’s goal is 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. A securitization can typically deliver interest rate savings of 50 to 200 basis points relative to other committed financing options, and proceeds can be used for any corporate purpose, including to:
- Refinance more expensive debt, including term loan A, term loan B, bonds and mezzanine debt
- More efficiently fund short-term and permanent working capital
- Fund acquisitions or capital expenditures
- Finance a dividend or a share repurchase
Securitizations are utilized by large corporations, typically with annual revenue greater than $1 billion, across diverse industries that have either an investment grade or a non-investment grade credit profile. A securitization is often used in conjunction with other sources of debt.
5 Questions to Ask When Considering a Securitization
- Does your company have more than $100 million in domestic accounts receivables (net of contractual allowances and excluding self-pay patient receivables)?
- 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 have a dedicated collection account network for accounts receivable payments?
- Does your company’s credit agreement permit a securitization, receivables purchase facility, receivables monetization, or factoring arrangement? If not, do other provisions allow for a securitization or can the matter be negotiated?
Teleflex has 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.
—Jake Elguicze, Vice President of Investor Relations and Treasurer, Teleflex Incorporated
What Makes a Securitization Unique?
Receivables’ cash flows are legally owned by a company’s wholly-owned limited purpose subsidiary, which is structured to be a bankruptcy-remote entity. The combination of the legal structure, some form of credit enhancement (e.g., over-collateralization), and diverse cash flows from the discrete asset pool, allow for lenders and investors to provide a facility with many benefits to the underlying operating company. A key benefit is an interest cost that is relatively low vs. other forms of committed financing and working capital solutions.
A securitization structure is also revolving, so new receivables generated are continually providing financing value. The business continues to manage its customers and receivables (and related collections) in the same manner as it did before the securitization. Such servicing control, including no notification to the company’s customers, can be a more favorable arrangement than other accounts receivable financing solutions in the market, such as traditional factoring.
PNC’s Expertise with Pharma & Life Sciences (PLS) Companies
Specific PLS sectors where PNC has executed securitizations include:
- Contract Development and Manufacturing Organizations (CDMOs)
- Contract Research Organizations (CROs)
- Clinical Labs
- Medical Devices/Equipment Manufacturers
- Pharma Distribution