GOSPODARKA SUROWCAMI MINERALNYMI Tom 24 2008 Zeszyt 4/2 PATRYCJA B K* Securitization as a method of financing coal mining industry Introduction Companies are constantly looping for different ways of gaining capital. They are financed using their own or external capital. The own capital can come from internal sources, e.g. retained profit or external ones (issuing of shares, hybrid financing, Private Equity/Venture Capital). External capital can come from the following sources [1]: bank credits and loans, issuing of bonds, leasing, factoring, forfaiting, franchising, asset securitization, issuance of commercial papers. Internal funds and capitals of the company are limited and they do not usually cover all the company s needs connected with its activity. Therefore it is necessary to look for the external financing sources. The capital is delivered by the creditors who do not become the company s co-owners that way. The company is just their debtor for some time. When choosing the financing source, companies use the following criteria [6]: accessibility of financing sources, cost of gaining capital, flexibility which the source offers, effect of financial leverage, level of risk. * AGH University of Science and Technology, Kraków, Poland.
266 In order to be able to use a given source, the company must fulfil specific conditions. The legal form of the company s activity, the type of business and the market situation or the company s value, which could be the guarantee for the source are crucial here. Large companies, which have their own solid financial base can issue new securities, such as bonds or shares, much easier than smaller entities. There is a similar situation in the case of bank credits. These companies, which have a larger property, have an easy access to bank funds. When granting a credit, the bank requires a suitable guarantee, such as the debtor s property. Moreover, the bank will require a larger credit guarantee form new companies, since they are regarded as riskier ones. Also, credit interest will be higher in the case of new entities, since the risk connected with the starting company is higher [12]. 1. Asset securitization as an element of financial market The development of the financial market in Poland gives more and more instruments which help find effective solutions for companies in almost every condition [11]. Asset securitization occupies a special place. It is one of means of financing both current activity and development [3]. It combines solutions taken from credit, money and capital markets. This technique has been used in Europe for about twelve years only [4]. It appeared in the USA thirty years ago and has been developing rapidly since then. Europe is now the second securitization market (after the USA), which developed quickly in the 80-ies. First European transactions were done by British banks, which securitized mortgage receivables. The banks did it to release the capital for business activities in other areas. Great Britain can be then called a forerunner in securitization. So far, the use of securitization on many domestic and foreign markets has shown that the process of transforming assets into securities (ABS Asset Backed Securities) brings numerous benefits for both the companies issuing them and potential investors who buy these papers. 2. Asset securitization the process Asset securitization is issuing securities, most often bonds of short-term securities, guaranteed by cash flows, generated by different, securitized types of assets [7]. In other words, securitization enables the transfer of selected asset groups (most often receivables), in which cash is tied up, into assets generating cash which can be used to finance company s business activities. Securitization is then a way of cash flows between the entities showing a surplus of them and the entities having their shortage. It is a way of direct capital gaining on financial markets through issuing papers, thus omitting traditional indirect financing, i.e. credits from traditional institutional brokers, banks, or other financial entities. According
267 to J. Kravitt, securitization is a subtle compilation of the skilful use of the deep and practical knowledge about the foreseen behaviour of the assets and confronted with the knowledge about a possible financial behaviour of the creator of this assets and selected structures, which will enable to finance these assets more effectively [5]. This expression explains clearly the idea of securitization and indicates a variety of solutions in this area under the invention of the asset creator [8]. Considering such a broad description of securitization, different forms can be distinguished. Two of them are mostly widespread [2]: balance (primary, non-structured) securitization, off-balance (secondary, structured, proper) securitization. Balance securitization is financing the company s activity by issuing securities bonds and other commercial papers placed on financial and capital markets. These papers are secured by the company s assets. This way, the borrower gains the necessary means directly from the investors, without the brokerage of the banking system. The capital market acts as a broker here, thus taking the place of specialized financial institutions. Off-balance securitization is the transfer of a selected asset group, in which the cash is frozen, into securities which can be then traded on financial markets in order to get the necessary capital. Off-balance securitization takes place when the true sale happens. Because of accountancy rules, which assume the necessity of separating credit risk of the securitization originator form the investment risk connected with the Assets Backed Securities, the transaction must be characterized by at least two features to be regarded as being off-balance [9]: the buyer of the ABS Special Purpose Vehicle cannot bear any regress claims against the originator of the securitization, Special Purpose Vehicle must be independent of the originator of the transaction. 3. Benefits of securitization All the benefits of this form of financing depend on the type of securitization, namely on the off-balance character of the transaction. Most benefits are gained when the transfer of assets which secure the issuance for the arranger to Special Purpose Vehicle is a sale. In that case, securitized assets (most often receivables) are wholly transferred to Special Purpose Vehicle. This means that receivables in assets in the balance will be reduced by this value. At the same time the value of cash is enhanced through the payment of Special Purpose Vehicle for the assets transferred from the arranger. As a result, the balance sum is not enhanced and financial ratios are not worsened. After gaining financial means from Special Purpose Vehicle, which were obtained through the issuance of securities, the arranger has more liquid assets, namely cash, and can repay some of their receivables. By using these means to repay their receivables, the originator gains benefits such as the improvement of the Return on Assets index.
268 The use of asset securitization, which is an off-balance operation, enables to lower the cost of the capital. It is possible thanks to the following: improvement of financial ratios (debt ratio), possibilities of direct freeing the company s capital, which has been frozen in assets so far, separation and full transfer of receivables to Special Purpose Vehicle. This results in reducing the total credit risk of the economic activity of the originator. In the case of off-balance securitization, after the true sale of the receivables to Special Purpose Vehicle, the balance sum of the originator remains unchanged. Also, debt and profit ratios do not change. Not until the gained means have been used, there are changes in the balance. The arranger can invest the means, and if the investment brings a profit, then, after some time, the debt ration will be lowered and the return on assets will be higher. The originator can pay their receivables using those means, which will improve the debt ratio immediately. The improvement of the debt ration also means a better evaluation of the company s credit score. Repaying the company s receivables using securitization means can also improve the company s situation by investors. Securitization aims at creating the transaction structure, which will be as safe as possible from the point of view of the investors. It is done through separating the risk connected with the originator s activity from the risk connected with Assets Backed Securities using a proper transaction structure, full control of cash flows between the entities and full capital separation of Special Purpose Vehicle. This company can not perform any activity except securitization. The company should be new, without any potential risk from its previous activity. Securitization should be done in such a way that it should generate in Special Purpose Vehicle a sufficient stream of cash flows, which will enable to repay the securities and cover the costs of the company s activity. The date of buying out the securities should depend on the fall of their collateral assets. In order to secure the maximum safety level, various mechanisms backing up the liquidity of Special Purpose Vehicle and limiting the risk connected with the poor quality of the assets are created. These mechanisms are divided into external (e.g. a guarantee form the municipal entity or bank loan support guaranteed on Special Purpose Vehicle) and internal (e.g. overcollateralization the value of the issued assets is lower than the nominal value of the collateral assets). Securitization is a way of gaining financial means by the company. From the point of view of the originator, securitization has many benefits. Firstly, the originator does not have to wait for receivables repayment, and in the case of a future debt flow, they can use it even before it appears. Thus, the means for the development of the company can be enhanced. It is especially important in the case of long-term receivables or heat plants, which need cash at the beginning of the heating season. Secondly, securitization enhances credit possibilities of the company, since it does not depend only on traditional banking. Financial sources become diversified then and the financial security of companies is larger. Moreover, securitization
269 is an off-balance form of crediting. It enables a significant improvement of the company s balance and subsequent indexes. Securitization makes the transfer of receivables into cash possible (reduced by the costs of the program and possible overcollateralization). Thanks to it, the company s balance can be largely improved. Securitization is aimed at creating a transaction structure, which is as safe as possible from the point of view of investors (the risk is limited to the one directly connected with the assets securing the transaction). Hence, the costs of gaining the capital are reduced. In the case of assets generating direct interests (credits, loans) it is even possible to gain a certain profit margin. As far as long-term assets are concerned (long-term loans), securitization can be a good financial instrument because it enables to create a long-term financing program (whereas for banking credits this period is usually 3 5 years). There are programs which are going to last 25 years. In Western countries, especially in the USA, Great Britain or Germany securitization is a frequent financing instrument of international Corporation, commercial banks, financial institutions, leasing and insurance companies, airlines or public utilities, companies whose clients always buy the same services, e.g. water companies, heat plants and telecommunication companies. In Western Europe, ca 150 bln Euro was involved in securitization [10]. Off-balance securitization is a complex process requiring the cooperation of many entities, such as: the company which needs financial means or the originator (arranger, creator) of the transaction, process administrator, advisor, issuer special purpose vehicle, swappers, rating agencies, guarantors, trustee, guarantor and distributor of the issuance, investors. In order to prepare and perform securitization, the cooperation of many entities is needed. These include: asset sellers, investors, special purpose vehicle, rating agencies, administrators, swappers and others. 4. Securitization as a source of capital for coal mining industry Coal mining industry is one of the most complex branches of the Polish industry considering all changes in economical transformation. Restructuring processes are very complicated here. A lot has been done so far, namely restructuring in technology, organization, property, employment and finances. Several coal mining companies are in good financial condition, still, the whole sector suffers from past unpaid receivables. Since these receivables must be repaid, activity, especially operations and investments, is influenced unfavourably. The activity in mining which is capital-consuming requires lots of capital spending. Therefore a free access of coal mining companies to many financial sources of operation and investment activity is crucial. The analysis of possibilities of gaining capital from sources other than traditional bank credits seems justified. Securitization of assets can be one of such sources, especially that the assets are of a large value in the case of coal mining companies. The aim of securitization in Polish coal mining industry would be then gaining capital and supporting restructuring and investment processes [8].
270 There are no direct rules about securitization in the Polish law system. Provisions are usually based on general rules concerning liabilities and securities. Since securitization is a complex transaction and covers both law and economy rules, the application of some of the regulations can arouse doubts. Firstly, the Polish law has several solutions concerning the transfer of assets to the Special Purpose Vehicle. According to economists, the cession of receivables seems the most appropriate solution. The cession, or transfer of receivables is an agreement, through which the owner their receivable onto another entity. The transfer can be applied to securitization because it does not need the agreement and knowledge of the debtor, because their legal position does not deteriorate and the special purpose vehicle (the assignee) has exactly as many rights as the creditor (the originator) has had so far. The originator bears the responsibility towards the special purpose vehicle, on the other hand the originator is not responsible for the debtors being sound and this, undoubtedly, is the weakness of the cession. Therefore, the special purpose vehicle bear the risk of not receiving the sums due. The problem can be solved by signing such an agreement, where the originator of the transaction is fully responsible. Conclusions The application of securitization in Polish economy requires detailed rules of securities issuance and constant monitoring of transactions. It is necessary to conduct a profound analysis of the profitability of securitization as well as financial and economical analyses concerning the structure of the securitization program, transaction guarantees and legal conditions. By applying securitization to the Polish mining industry it possible to hasten up the restructuring process, because past debts will be repaid and this repayment is the main part of the financial restructuring. Also, basic financial indexes and the liquidity of sector entities will be improved. Study with financial participation of the Ministry of Science and University level School statutory paper no 11.11.100.279. REFERENCES [1] Bendkowski J., 1993 Informacja ekonomiczna w przedsiêbiorstwie. Skrypt Uczelniany Politechniki Œl¹skiej nr 1773, Gliwice. [2] Gudkova S., 2002 Sekurytyzacja nale noœci kredytowych banków. Wydawnictwo Wy szej Szko³y Przedsiêbiorczoœci i Zarz¹dzania im. Leona KoŸmiñskiego, Warszawa. [3] Jajuga K., Jajuga T., 1999 Inwestycje. Instrumenty finansowe. Ryzyko finansowe. In ynieria finansowa. Warszawa, PWN. [4] J ó Ÿ w i a k S., W i œ n i e w s k i P., 2003 Europejski rynek sekurytyzacji. Bank Miesiêcznik Finansowy nr 9.
271 [5] K r a v i t t J., M a y e r, 1998 Introduction to Securitization. Brown & Platt. [6] R u t k o w s k i A., 2001 Jak dobrze siê zad³u yæ. Prawo Przedsiêbiorcy Nr 4. [7] S i e r p i ñ s k a M., J a c h n a T., 2004 Ocena przedsiêbiorstwa wed³ug standardów œwiatowych. Wydawnictwo Naukowe PWN, Warszawa. [8] S i e r p i ñ s k a M., 2005 Sekurytyzacja aktywów mo liwoœci jej zastosowania w górnictwie wêgla kamiennego. Wiadomoœci Górnicze 4. [9] S t y n I., 2001 Korzyœci z sekurytyzacji pozabilansowej. Rynek Terminowy 2001 nr 14 (4/01). [10] www.europeansecuritisation.com [11] www.sekurytyzacja.info.pl [12] Z o m b i r t J., 2001 Sekurytyzacja prawie gotowe rekomendacje. Bank Miesiêcznik Finansowy nr 12. SEKURYTYZACJA JAKO METODA FINANSOWANIA GÓRNICTWA WÊGLA S³owa kluczowe Sekurytyzacja, polski rynek kapita³owy, górnictwo wêgla, pojazd specjalnego przeznaczenia, spó³ka górnicza, fundusze inwestycyjne Streszczenie Kapita³ wewnêtrzny, za pomoc¹ którego finansowane jest rozwijanie ju istniej¹cej firmy zwykle pochodzi z wk³adu kapita³owego w³aœciciela i zysków zatrzymanych. Firma, która ceni sw¹ pozycjê rynkow¹, przeznacza na inwestycje ca³oœæ lub czêœæ swoich zysków, ograniczaj¹c przez to wyp³aty dywidendy. Innym sposobem powiêkszenia kapita³u wewnêtrznego jest pozyskanie go od dawnych lub nowych w³aœcicieli. Mo liwoœci akumulacji kapita³u s¹ ró ne i zale ¹ od organizacyjnej i prawnej struktury podmiotu. Kapita³ wewnêtrzny w spó³ce kapita³owej powiêksza siê poprzez emisjê akcji. Firma mo e równie byæ rozwijana dziêki kapita³owi zewnêtrznemu, mianowicie d³ugoterminowym kredytom bankowym, po yczkom udzielanym przez podmioty finansowe i obligacjom. Kredyty bankowe s¹ na polskim rynku g³ównym Ÿród³em pozyskania zewnêtrznego kapita³u. Firmy mog¹ korzystaæ z kredytów oferowanych przez banki konkuruj¹ce ze sob¹. Innym Ÿród³em kapita³u zewnêtrznego jest emisja i sprzeda obligacji firmy. Obligacje s¹ d³ugoterminowym instrumentem s³u ¹cym do finansowania du ych firm. Daj¹ one równie dostêp do kapita³u innego ni kredyt bankowy. Rozwój gospodarczy, zmiany na rynku kapita³owym i wiedza inwestycyjna polskich przedsiêbiorców tworz¹ warunki dla nowych form pozyskiwania kapita³u, takich jak sekurytyzacja. Jest to technika finansowa udostêpniaj¹ca kapita³ dla tych podmiotów, które nie maj¹ mo liwoœci pozyskania œrodków finansowych na rynkach papierów wartoœciowych. W ten sposób mo na pozyskaæ zarówno kapita³ inwestycyjny, jak i obrotowy. Proces ten jest oparty na przekazaniu aktywów, które wydzielono z bilansu firmy do papierów wartoœciowych. Te papiery wartoœciowe staj¹ siê nastêpnie przedmiotem obrotu. Sekurytyzacja aktywów jest alternatywn¹ form¹ finansowania dzia³alnoœci gospodarczej dla kredytów bankowych lub emisji papierów wartoœciowych. W Polsce sekurytyzacja jest wci¹ nowink¹ na rynku kapita³owym. W Europie Zachodniej instrumenty te nale ¹ do najczêœciej zakupywanych przez inwestorów. Sekurytyzacja jest wówczas kolejnym krokiem ku nowym metodom finansowania. SECURITIZATION AS A METHOD OF FINANCING COAL MINING INDUSTRY Key words Securitization, Polish capital market, coal mining industry, special purpose vehicle, coal mining company, investment funds
272 Abstract Internal capital, which finances the development of the already existing company generally comes from the owner s capital share and the retained profits. The company which values its market position spends all or some of its profits on investments, thus limiting payments of the dividend. Another means of enlarging the internal capital is gaining it from the former or new owners. The possibilities of capital accumulation are varied and they depend on the organizational and legal structure of the entity. Internal capital in a joint stock company is enhanced through shares issue. The development of the company can also be done by external capital, namely long-term bank credits, loans given by financial entities and bonds. Bank credits are the main source of gaining external capital on the Polish market. Companies can make use of credit which are offered by competing banks. Another source of external capital is issuing and sale of the company bonds. Bonds are a long-term instrument for financing large companies. They also give access to capital other than bank credit. Economic development, changes of the capital market and investment knowledge of Polish entrepreneurs create conditions for new forms of capital gaining, such as securitization. It is a financial technique which makes capital gaining possible for those entities, which have had no possibilities of obtaining financial means on securities markets. Both investment and flow capital can be obtained that way. The process is based on the transfer of assets which were separated from the company balance into securities. These securities become then an object of flow. Asset securitization is an alternative form of financing economical activity as compared with bank credits or issuing securities. In Poland, securitization is still a novelty on the capital market. In Western Europe, these instruments are most often purchased by investors. Securitization is then another step towards new methods of financing.