Securitize

Securitize

The practice of a company selling accounts receivables or other debts owed to it. The third party that buys the debt assumes ownership of it and the responsibility for collecting the debts, and keeps the repayments when made. When it sells the debt to the third party, the company recognizes the sale price of debts as a positive cash flow under GAAP rules.

Notes:

There are times when a business may need the help of specialized collections abilities of a third party collections agency in order to spur debt reconciliation from delinquent debtors. But companies sometimes securitize to materially adjust their operating cash flow performance.

By selling their debts to a third party - at a price usually significantly less than the value of the debts themselves - a company claims the cash flows sooner. If the company has poor cash flow in a given quarter, the securitizing helps cover up the poor performance on the financial statements. Investors therefore need to scrutinize the rationale behind a company's choice to securitize their debts, ensuring its purpose is to serve the company's bottom line instead of dressing up the financial statements.

See also: Accounts Receivable - AR, Cash Flow, Cash Flow per Share, GAAP, Operating Cash Flow Ratio