Here at Brex we recently closed our third securitization. The deal included $260MM of asset-based notes for Brex’s corporate charge card, of which almost all ($254MM) were rated AA, the second highest rating a deal can achieve, by Kroll Bond Rating Agency. That is super exciting for us — but what does it actually mean? Why do we pursue securitizations, and why do we think it’s a big deal?

Securitizations can be confusing, and complicated, and are often misunderstood. Since the announcement a few weeks ago, I have received questions from all corners of the startup ecosystem, so I figured it would be helpful to type up my thoughts on what securitizations are, why we do them, and what I think should be top of mind for companies that want to develop their own securitization strategy.

Let’s start with the basics

First things first. What is a securitization? In the most simple terms, securitization is the process in which assets are pooled together and packaged into securities that pay interest to the buyers of the securities. The buyers of these assets are debt investors who want to earn interest on their investments. The expectation is for investors to recoup their initial investment on or before the maturity date of the securities. In a way, a company’s first securitization can be thought of as the equivalent of a fundraise, but on the debt front instead of on the equity side.

For Brex, the assets are our corporate card receivables that are created when our customers swipe their Brex charge cards. A bunch of different asset classes are securitized: corporate loans, auto loans, student loans, and mortgages (both residential and commercial), just to name a few. This is a huge market with ~$12 trillion of assets getting securitized each year in the US alone.

One of several ways to fund growth

It’s important to understand securitizations in the broader context of Brex. There are essentially three ways for Brex (and other companies like us) to finance our receivables:

1. Use cash. To fund a card receivable, you could just use your cash on hand. While the cost of funding this growth doesn’t show up on the P&L (cash is a balance sheet item), this is often the most expensive form of capital. Cash is precious, especially if you’re burning money every month.
2. Use credit warehouse facilities. A warehouse facility is a type of loan companies take out with a financial institution, such as a bank, in order to fund loans or receivables (in Brex’s case, charge card receivables). The cost of funding comes with an interest rate paid to the financial institution, and that shows up on the P&L. This tends to be a more efficient use of capital and funding structure vs. cash.
3. Securitize your receivables. The topic of this post 😀

So why securitize?

There are four key reasons a company may choose securitization as a way to fund growth:

• Capital diversification. The three approaches highlighted above are not mutually exclusive. In fact, a credit warehouse facility always requires the issuers to use some of their own cash to fund. The percentage of total funding that the credit facility will fund is called an Advance Rate, and this rate can vary quite a bit. The delta between the full funding needs and the advance rate is typically funded with cash. At Brex, we have three warehouse facilities, and have now completed three securitizations. All in all, a securitization offers an opportunity to diversify your funding strategy and access a broader / different investor base. As mentioned above, by securitizing assets you pool assets together and bundle them into securities, which can attract a wide range of investors with varying risk appetites. All else equal, leveraging multiple funding sources reduces dependency on any single one. Minimizing counterparty risk is always a top priority for Brex.
• Lower cost of funding leads to more product investment. Solid performance on credit has always been important at Brex, and this has led to strong capital markets execution. This is reflected in the ratings upgrade (from A to AA) we received on our most recent securitization. As a result of this, our securitizations are lower-cost compared with other options, which allows us to continue to bolster our customer offering. At the end of the day, we are here to build the best product we can for our tens of thousands of customers, and this allows us to scale in a capital-efficient manner.
• A way to differentiate against competitors. Completing a securitization indicates a certain level of maturity and capital markets sophistication. The process takes months and involves hours of crafting, and then pitching, the right narrative to investors, over and over again. Completing a transaction like this doesn’t happen overnight. A strong securitization transaction is a way to show you are a leader in your space, particularly if competitors haven’t yet been able to complete one or if they have weaker ratings.
• Signals market strength. Since the underlying securities in a securitization get rated, it’s a great tool to understand where you stand relative to other issuers. Achieving strong ratings (which Brex has been fortunate to do) matters for many of the counterparties we deal with, including large prospective enterprise customers, our new and existing financial partners, as well as investors on the equity front.

Should your business pursue a securitization?

As is hopefully evident from this post, a securitization can come with many pros. However, there is a place and time for everything. By definition, securitizations are only relevant for companies with something to securitize. Assuming your company checks that box, my advice is to weigh the pros and cons of pursuing one. It will take time, it will likely be more challenging and the process more “choppy” than you think, but if you can it’s an incredible opportunity to pole vault your business to the next level.

If you work for a company where you have contemplated a securitization as part of your strategy, I’d love to talk. At this point, we have spent a lot of time thinking about our capital markets strategy in general and securitizations in particular for 5+ years, and we have learned plenty along the way.