Asset Backed Securities (ABS)

Harness Cost-Effective Funding Sources Efficiently and Professionally

In today’s economy, Asset-Backed Securities (ABS) are a common financial instrument used by companies that have a high volume of accounts receivable. For those companies, Asset-Backed Securities are a cost-effective means of refinancing that allows them to reduce their debt ratio as well as their dependence on banks. For many companies, ABS transactions – in addition to factoring – have become a well-established means of selling their accounts receivable to a funding source in order to finance their business and are a meaningful way to improve a company’s liquidity.

ABS Transaction – Refinancing on Favorable Conditions

Receivables are sold to a Special Purpose Vehicle (SPV), a separate entity which is tailored to the specific needs of the originator and thus offers a high degree of flexibility. The SPV generates liquidity for purchasing receivables by issuing bonds with different maturities. The cash the originator receives for the receivables that were transferred to the SPV frees up cash flow that the originator can use to settle their liabilities. This, in turn, will improve their capital ratios – particularly their fixed-assets-to-equity ratio. By cleaning up their balance sheet in this way, companies will improve their credit rating and will be in a better position to obtain capital at lower costs.

Since the SPV’s sole function is to buy assets in order to securitize them, the collection of the receivables that were transferred to the SPV needs to be taken care of by the originator or by an external collection agency. Payments received from debtors are passed on to the SPV, which, in turn, uses this cash to repay the bond investors. The receivables that are sold to the SPV are credit-enhanced with extra protection in order to reduce the risk of credit losses. On the whole, any SPV in an ABS program should be as risk-free as possible so as to obtain a positive credit rating and to secure favorable refinancing terms.

Unlike factoring, which is limited to receivables from goods and services, securitization through ABS can be based on any asset that generates cash flows from different kinds of sources. While in the past it was only big corporations that could afford access to this funding source, standardized structuring has helped medium-sized companies to gain access to promising business opportunities in the securitization market.

Financing Opportunities for Businesses – Complex Processes

ABS transactions are an attractive and modern financing option. While this type of financing offers huge benefits for companies, there also are challenges due to the complex processes and administrative handling involved. Having the technical support of a state-of-the-art business software solution is critical if companies are to manage the complexity of their ABS transactions successfully. It makes sense to manage all the tasks relating to ABS transactions in the same system environment in which a company handles all their other receivables-related processes. This system is usually SAP. The SAP standard environment, however, does not offer adequate support for managing ABS transactions. It is vital, though, to handle all the ABS processes in the SAP system in order to harness the full benefits from refinancing through ABS transactions without having any liquidity gains eclipsed by administrative expenses.


Why don’t you see for yourself what our SOPLEX AL (ABS Link) solution can do for your organization?