Engineering a Way Around the Sovereign Ceiling

Abstract

Financing a stream of future export revenue via an offshore funding vehicle is a way of partially insulating assets from the negative externality caused by a sovereign’s ability and willingness to control the market for foreign currency and the flow of it out of the country. We show how firms with credit ratings constrained by the sovereign’s foreign currency credit rating may derive more value from securitizing future export receivables the higher is their unconstrained rating relative to the sovereign rating. We predict that within a country, firms with higher unconstrained ratings will execute more future-flow securitizations than lower-rated firms in the same country.