NEW YORK — WestPoint Stevens has gone through a series of restructurings, including a bankruptcy, and its credit standing is less than prime.
Yet it recently raised $133 million at the same low interest cost as a top-rated company.
The maneuver: securing its receivables. Simply put, the receivables are placed in a pool and investors are sold pieces of the pool. This, in effect, transfers the credit risk from WestPoint to WestPoint’s customers, many of whom are top-rated.
According to the prospectus for the WPS issues, just seven customers accounted for 50 percent of WestPoint’s Home Fashion Division sales and 43 percent of total sales. Thus a large portion of the receivables were generated by these well-rated customers.
At the top is Wal-Mart Stores, which accounted for 11 percent of WPS consolidated sales last year. The others listed were J.C. Penney Co., Sears Roebuck & Co., Montgomery Ward & Co., Kmart Corp. and the Mervyn’s and Target divisions of Dayton Hudson Corp.
The prospectus points out that while there is no reason to believe WPSwill lose the business of any of these customers, if it did, there could be a material decline in the generation of receivables.
Raising relatively low-cost money through the packaging and sale to the public of consumer receivables has been a staple of the credit-card industry for about a decade, but the sale of trade receivables is fairly new.
So far, Standard & Poor’s has rated only three such deals:WPS deal last month and two other non-soft goods firms in 1993.
Using receivables of its Alamac Knit Fabrics division, WPS raised $133 million through the sale of receivables-backed certificates.
S&P has rated the $115 million of Class A WestPoint Stevens certificates Triple A and $18 million Class B certificates Single A, both well above WestPoint Stevens’s own debt rating.
The difference between the two classes is that the A certificates must be paid in full before the B units get anything. If S&P were evaluating a direct obligation of WPS, the ratings would be much lower. WPS is highly leveraged with long-term debt of $1.1 billion and a shareholder deficit. It has pledged substantially all of its assets, except receivables, to holders of senior bank debt. Aside from providing the information that the company is highly leveraged, the prospectus doesn’t even contain basic balance sheet and operating information on WPS. Instead it focuses on the receivables.
Related Articles
You May Also Like
The higher the rating, the lower the cost of money. The interest rate on the Class A certificates is the one-month London Interbank Offering Rate (LIBOR) plus 0.27 percent. At the current LIBOR rate, the certificates would pay about 4.7 percent. The Class B certificates pay a little more, LIBOR plus 0.57 percent. This comes out to about 5 percent. In contrast, WestPoint Stevens has about $400 million in senior notes out that cost 8 3/4 percent and another $550 million issue of senior subordinated debentures that cost 9 3/8 percent. Interest is paid monthly and varies, based on LIBOR. Underwriting costs of the certificates came to $1.5 million, reducing the company’s proceeds to $131.5 million.
The certificates are issued by a trust set up to own the receivables. In essence, the $133 million was borrowed against receivables with a face value of $202 million. The agreement requires that the collateral be at least 22 percent above the outstanding balance of the Class A certificates and 14 percent above the Class B outstanding.
In addition to public certificates, WPS will also be able to sell up to $27 million in privately placed, receivables-backed certificates.
Under the arrangement, WPS will continue to service the receivables, handling the collections and credit approvals. Since the receivables involved are short-term, generally 30 to 60 days, as they are collected, WPS will replace them with new receivables. In the meantime, it gets to use the cash.
Assuming everything goes smoothly, the certificates will mature in five years when the receivables will be allowed to cash out to repay the certificates.
The arrangement differs from factoring principally because the service segment is missing. Factors purchase receivables, but in addition they provide credit checking, credit guarantees, bookkeeping, billing and collection services.
Lawrence A. Marsiello, president and chief executive officer of CIT Group/Financial Services, the nation’s largest factoring firm, said he didn’t think the WestPoint strategy is any threat to factors. This type of financing, he said, “is only available to a large corporation with a strong customer base.”