TELUS and Securitization Research Paper
One should start by saying that TELUS Inc is one of the largest and most competitive Canadian providers of data, internet protocols, voice and wireless communications and Ethernet services. The company provides a full range of various communication products and services that connect the world. In the year ended December 31, 2004, TELUS generated more than $7 billion in revenues.
TELUS employs over 25 thousand people with offices scattered across Canada. The following research paper will speak about the securitization process as present in TELUS corporation.
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Securitization is viewed at TELUS as a financial technique that pools corporate assets together and thus turns them into a tradable security. TELUS believes that the use of securitization will allow the company to immediately realize the cash value of a cash-producing asset. Securitization started in 1970s and currently formed a market that equals to about $6.8 trillion.
Asset backed securities (ABS) are bonds that are backed by a pool of corporate financial assets that are not easily traded in their existing form. Yet by pooling a great number of these illiquid assets into one large pool, one manages to create new instruments that are easily bought and sold on the major capital markets (Stone, 88).
The securitization process works this way. The originator establishes a large pool of financial assets, such as mortgage loans, and then in turn sells these assets to a new investment vehicle that in turn would issue bonds that are backed up by these financial instruments/assets.
There is a difference between ABS and conventional bonds. Thus, if investors purchase and hold a regular bond, they receive regular payments during the life of that bond, plus the face value of the bond at the end of the bond’s life. Therefore, as long as the issuer of the bonds makes these regular payments and is financially healthy it will continue making these payments. Thus, the risk of default of the bonds is directly correlated with the risk of corporate bankruptcy and depends on corporate solvency (Davidson, 129).
Securitization is a more complex process and the payments primarily depend on the cash flows generated by the underlying pool of securities. Since the pool comprises many different assets, investors are given a certain level of protection should the company that created the financial asset goes bankrupt.
Because of such peculiarity applicable to the securitization process, ABS allows various companies to issue bonds with very high credit ratings, usually AAA, A+++. It is rather hard to achieve such high credit rating with regular ‘classical’ bonds. ABS thus allows TELUS and other companies to borrow money at a much cheaper rate.
one needs to remember that although residential mortgages were the first financial assets to be securitized, various non-mortgage related securitized assets appears on the financial market and comprised instruments like credit card payments, trade accounts receivable, auto loans and even student loans. If my memory does not fail me one would even use the royalty payments on David Bowie’s back catalog as an assets that qualifies for securitization.
TELUS finds the securitization process as a useful tool of generating cheap cash flows for the company in times of need. Annual issuance of securitized securities is about $800 billion which certainly makes the ABS market a place for TELUS to borrow money.
It is no wonder that “For TELUS, the securitization of its equipment leasing portfolio, currently managed by Telecom Leasing Canada (TLC) Limited (TLC), a wholly owned subsidiary of TELUS, will advance its national growth strategy and enable it to pay down debt incurred for strategic acquisitions.” (http://about.telus.com/cgi-bin/media_news_viewer.cgi?mode=2&news_id=275 ).
Understanding the advantage of the cheap funds generated by securitization TELUS will “apply the proceeds of the transaction, valued at C$147 million, toward the reduction in its bank operating borrowings thereby improving the financial flexibility of TELUS to invest in the growth areas of data, Internet Protocol and wireless” (http://about.telus.com/cgi-bin/media_news_viewer.cgi?mode=2&news_id=275). As a result of the successful securitization initiative for TELUS the company managed to raise about $1.2 billion from divestiture which it subsequently turned into securitization. One needs to remember that the company surpassed its goal of raising up to $1 billion. In 2004, TELUS had established a new financing plan that would use the free cash flows generated by its operations to “reduce and repurchase debt and amounts outstanding under its accounts receivable securitization program” (http://www.tmcnet.com/usubmit/2005/Feb/1119409.htm ). The company also plans to redeem its publicly held preference and preferred shares of TELUS communications, since Asset backed securities deployed in the securitization program of TELUS will provide the same financial resources at a much cheaper rate. As the article noted, TELUS in 2004 already repaid about $200 million in debt and would engage in sale of securitized accounts receivable. One reads further and understands that TELUS has about 900 million in cash and an undrawn credit facilities of $1.6 billion let alone cash generated by operating activities, TELUS is believed to have enough of financial resources to undergo proper corporate operations and engage in redemption of more expensive debt such as debentures (http://www.infoworld.com/Nokia/company_45847.html?view=3&curNodeId=0&prId=TO25718022005-1 ).
In conclusion, I would like to note that securitization is a very useful alternative to traditional debt as provided by banks or other financial institutions/market. Securitization allows the companies with imperfect credit rating to create triple A rated securities and thus benefit from the lower rates associated with the securities with low risks. TELUS corporation understood the advantages of securitization in 2001 and that same year engaged in creation of some ABS. In 2004, TELUS engaged in the process of redeeming its other debt and generate most of its cash flows from securitization.
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