Put your assets to work.

• Author: Arora, Rahul

Leases and lumber, tractors and ticket receipts. These seemingly unrelated items are just a few of the assets backing privately issued securities - one of today's most innovative financing methods.

In 1985, Sperry Lease Finance Corp. issued an equipment lease transaction in the public market, creating the first asset-backed security, according to the Dean Witter Asset-Backed Securities Reference Guide. In a little over a decade, asset securitization has come of age in terms of investor acceptance, its position as a cost-effective financing alternative and its role as a staple of large underwriting houses.

The enormous public asset-backed securities market is dominated by two asset classes: credit card receivables and auto loans. Within each of these asset classes, asset-backed deals have become so commonplace that they resemble one another structurally.

The smaller, private asset-backed securities market receives less media attention, but it's actually more dynamic than the public market. Private asset-backed securities deals are typically tailored for a predetermined investor or group of investors, allowing for greater structural flexibility. Until recently, for example, most private placements were backed by equipment leases, trade receivables, health care receivables and subprime auto loans. In 1995, however, some transactions were backed by asset types that could be considered obscure: health-club initiation-fee receivables, home water purification system sales contracts, airline ticket receivables and distressed, nonperforming consumer loans. These are just a few examples of receivables securitized for the first time.

The trend toward such a wide array of asset types opens the private asset-backed securities market to companies that may previously have considered themselves excluded. Now, companies with virtually any type of receivable can be sold off a firm's balance sheet and securitized. Northwest Airlines used ticket receivables for asset-backed securities; Pacific Lumber used trees.

Strong investor demand has opened a wide window of opportunity for would-be issuers of asset-backed securities. If you've been considering an asset-backed issue, here's a map of the marketplace and the hurdles faced by first-time issuers.

THE LAY OF THE LAND

In 1995, public issuance of asset-backed securities reached approximately $110 billion, an industry record and nearly a tenfold increase over 1985, when just seven asset-backed securities transactions were completed at an approximate value of $1.4 billion. With that kind of acceptance and financial strength, this financing technique should be considered an established alternative to straight corporate debt. Indeed, for larger issuers in the public market, asset securitization usually offers a AAA pricing complement to current funding sources.

As a result of the market's acceptance and the historical performance of these securities, investor returns have gradually gotten smaller. Consequently, an increasing number of investors are considering relatively smaller and lower-rated private placements that offer enhanced yield.

For a private issuer, asset-backed finance can be a major strategy in the company's overall business plan. The growth of the private market offers some companies the opportunity to issue off-balance-sheet debt at a cost that's competitive with...