SECURITISATION
The word ‘securitisation’ literally means, “to turn into securities”. In a securitisation programme, the owner or originator of assets that produce a cash flow stream transfers those assets to a special purpose vehicle (SPV). Relying on the cash flow from those assets and certain other structural and enhancement features, the SPV issues securities.
The securities are usually liquid, negotiable and often highly rated and include floating rate notes and commercial paper. The securities are designated ‘asset-backed securities’ as each security is backed by a specific pool of assets rather than being a general corporate obligation of an issuer. Funds raised by the issue of securities are used to fund purchases by the SPV from the originator.
The term “securitisation” has been extended to cover transactions in which a bank term or warehouse facility is used to provide funds to the SPV on a non-recourse basis, rather than securities being issued.
Company advantages from securitisation
There are many advantages to securitisation, some or all of which may be applicable to your particular company. Some of the advantages are:
Release of capital |
Securitisation converts illiquid, low or negative
yielding assets into cash that you can use:
• To purchase high yielding assets
• To repay high cost debt or equity
• To finance business growth including by acquisition or
• For any other purpose. |
Off-balance-sheet treatment |
The transfer of assets from you, as seller, to the special purpose vehicle can be structured as a sale of assets, removing the assets from your balance sheet. This increases the return on assets and return on equity measures and decreases gearing and the weighted average cost of capital (WACC). |
Reduce cost of funds |
By using structural and credit enhancement,
securitisation enhances the credit of the transferred assets
to a level that enables funding to be obtained from the
capital markets at a lower spread. |
Funds are potentially unlimited
|
In a revolving securitisation, subject to a programme
limit, the amount of funds grows proportionally to the size
of the asset portfolio. |
Diversify funding to reduce
liquidity risk |
Diversifying funding sources reduces liquidity risk if
one or more sources of funding increase in cost or become
unavailable. |
Market risk transfer |
Securitisation can minimise or eliminate interest rate
risk through interest rate swaps and other hedging
mechanisms. Some organisations are restricted in their use
of derivative products such as interest rate swaps.
Securitisation allows the use of swaps and hedges to
minimise certain risks (e.g. currency and interest rate
risk). For example, fixed rate mortgages can be finance by
floating rate notes. Interest rate swaps remove the risk of
the floating rate increasing and thus reducing the profit
margin. |
Limited covenants |
Many other forms of funding incorporate restrictive
covenants on operations. Securitisation covenants generally
focus on the asset portfolio being securitised with only
limited covenants over other operations. |
Limited disclosure |
Compared with other sources of funding, securitisation
usually requires little public disclosure. The focus is
normally on the issuing SPV rather than the transaction
sponsor. |
Improve asset management |
Securitisation focuses attention on the asset portfolio
being securitised, often improving the performance of those
assets and the systems supporting those assets. This
increases cash flow and reduced the cost of funds. |
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