68 3 Reduction of External Funding Needs
technique uses a variant of the concept of a secured loan rather than a true sale
structure. The essential difference between the two models is that in a whole
business structure, it is the cash flows from the entire range of operating revenues
generated by a whole business, or a segregated part of a larger business, that are
securitised. This means that a wider range of assets can be offered to support the
securitisation, which in some cases might lead to larger sums being raised.
However, this type of deal can also be more costly to establish. There are
additional legal costs of setting up the appropriate corporate structures to manage
the cash flows and additional costs of arranging the necessary credit enhancements
and appropriate covenants to achieve a high credit rating.
The structure of the whole business securitisation is very similar to that of the
secured loan. The aim of the structure is to ring-fence the operating cash flows
both from the claims of the company’s other creditors and from the risk of the
company’s insolvency.
Typically, the parent company incorporates a wholly-owned subsidiary to hold
all the shares in a second subsidiary, which operates the business, owns the assets,
and borrows the money from the SPV to pay for those assets. The SPV will also
be a wholly-owned subsidiary of the parent and it will act as the issuer of the
securities.
The constitutional documents of the SPV will restrict its activities to the
activities required by the transaction. The bonds issued by the SPV are enhanced
by this corporate group granting the investors security over all of the group’s
assets. Often the collateral is not given to the SPV directly, but to a security
trustee who holds the collateral on trust for the SPV. The SPV will typically give a
security over all of its assets to the security trustee, who will hold that collateral on
trust for the bondholders. This structure is also likely to be supported by
guarantees from the parent and the subsidiary company that acts as a holding
company.
For example, Stora Enso, a Finnish-Swedish paper company, carried out a whole-business
securitisation transaction on its Finnish forest assets in 2002. Stora Enso transferred its
forest assets in Finland into its newly established subsidiary, Tornator Oy, which paid for
the assets. A special purpose vehicle was formed (Tornator Finance Plc, a public limited-
liability company incorporated in Ireland). The SPV raised €370 million from 45 European
investors by issuing secured bonds. The proceeds were used to finance the securitisation
transaction. The primary source of funds for servicing interest and repayments of capital
falling due to investors was the income generated by the business of the Tornator
companies (the income from the sale of felling rights to harvest wood, the provision of
forest management services which were offered also to third-party private landowners and
the sale of certain selected land areas).
Covenants in secured loan and the whole business organisation securitisation. As
can be seen, a key element in both the secured loan and the whole business
securitisation structure is the loan agreement between the operating companies and
the SPV. The covenants in the loan agreements play a crucial part in helping to
mitigate the risk exposure of investors.