In order to accurately predict cash flows in corporate securitizations, firms must focus on business risk, according to a report issued by Standard & Poor’s. The report identifies key determinants of business risk, and spells out how they influence the proportion of senior to subordinated debt in a structure, the rating levels of individual debt tranches, the leverage a transaction can absorb, and the level of structural credit enhancements needed. ‘Corporate securitizations are unique in that they can include substantial parts of a company’s business, or even its entire operations, and as a result the level of business risk can strongly influence the predictability of cash flows,’ said Blaise Ganguin, managing director in Standard & Poor’s European Corporate Ratings group and one of the authors of the report. All else being equal, the more sustainable and predictable the underlying cash flows in a corporate securitization, the lower the risk of default over time. Structural features such as cash reserves, liquidity facilities, and bankruptcy remoteness may mitigate the risk of short-term cash flow interruptions.
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