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.