Case Study
We Accept Diners Club

Prof. Ian Giddy, New York University


When Diners Club (Singapore) launched its credit card business last in 1999, finance manager Peter Tam had no idea that new customers would account for 20 percent of the company's total client base within six months. Now Tam forecasts that this segment will make up more than half of Diners Club subscribers in the next three years. And as it grows, so does the need to fund the business.

Tam needed a funding structure that would not lock in Diners Club with a fixed amount of debt for a fixed period of time. He had to have room for more borrowings in line with the growth of the business. The answer came in the form of a revolving asset-backed securitization. It allows Diners Club to sell securities backed by credit card receivables on a monthly basis. The size may vary according to its working capital needs at that time. "With the growth in credit card base, we need a funding structure that would grow as our receivables grow. Securitization did just that," Tam says. ABN Amro Singapore managed the transaction.

Under the deal, Diners Club sells credit card receivables to a special purpose vehicle (SPV) it created. This SPV then issues 30-day certificates backed by the receivables to a unit of ABN Amro. This conduit in turn sells the certificates on the US commercial paper market, offering paper with a maturity of 270 days or less. The bank earns fees for administering the conduit, and for offering a backup liquidity facility. When the certificates mature, Diners Club has the option to issue another round of certificates, backed by another round of receivables. This option lasts three years. In the first tranche of S$44 million (US$25.9 million) in May 2000, Diners Club paid an annual rate of 3.6 percent, a fraction of the annual 36 percent it normally charges credit card holders.

"Diners wanted a financing program that could be modified on a monthly basis. The easiest way to do that was to issue in the commercial paper market, because we can go in and increase the size later depending on their needs," says Gary Watmore, head of Asia Pacific Securitization at ABN Amro in Singapore.

They chose the US commercial paper market for its liquidity - it is the most liquid money market in the world. Singapore, by contrast, is just opening its doors for corporate bonds. Diners Club's Asian operation became the first company from the city-state to sell securities backed by anything other than rentals and mortgages. But Diners Club may be bringing more business to Singapore. The SPV it created also has a license to sell certificates to the Singapore market within the next three years. "I'm hoping the Singapore market will take off. Although we are not exposed to foreign exchange risk because of a currency swap, once I go into the Singapore market, I will not need to pay the market for that facility anymore," says Tam

ABN AMRO is a global leader in originating and structuring securitization transactions, with capabilities in North America, Europe, Australia, Asia and Latin America. ABN AMRO is also one of the largest administrators of asset-backed commercial paper programs with over $38 billion in outstanding ABCP (2003 data). In addition to its many asset-backed commercial paper conduits, including Windmill Funding, Amsterdam Funding, Tulip Funding and Tasman/Abel Funding, ABN AMRO has securitization professionals who specialize in origination and execution of mortgage and asset-backed securities around the globe. ABN AMRO also has a fixed income sales force in leading financial centers as well as key emerging markets.



Questions:

1. How does the securitization of corporate receivables work?
 2. Can this technique be used to save a company financing costs, or to obtain access to a different source of funding, or both? How?
 3. What other companies could benefit from this? What companies would probably not find this approach beneficial? Explain.
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