securitization

• What is securitisation?


  Process of taking illiquid assets and through financial engineering, transforming them into security.
• What are the conditions for a cash flow for securitisation?

  • Must be homogeneous
  • Stable and predictable
  • Legal right to assign or transfer to spv
• What are the benefits of secuiritisation?

  • better than issuing equity, as it does not dilute control or decrease earnings.
  • Isolates cash flows. FRN not contaminated
  • Makes transfer bankruptcy remote, if bust future cash flows to spv not liquidator.
• How to set up?

  • set up in cayman islands, avoid jurisdictional issues.
  • Earnings transfer to reliable 3rd party
  • Register somewhere known to investors
• Why service a sinking fund?

  • Use erratic earnings to service, attached to spv to strengthen and decrease the basis point spread.
  • Reassures investors that principal payment is met at security, providing assurance that cash released on maturity of frn.
  • "jam jar", under control by reliable 3rd party ensures no dipping into funds.
• How to strengthen spv?

  • Transfer assets by the originator to spv.
  • Investors know if default on bond, they will get cash flows and assets.
  • Offer a full or partial guarantee, with the originator standing behind the spv.
  • Offer wrap around insurance, a policy against default on interest payments.
• What are the benefits of an spv?

  • Decreases risk of parent company. Allows higher credit rating, deceasing finance costs and enhancing financial flexibility.
  • Help avoid withholding tax, making bond issue with gross not net.
  • Protects both parties. Investors from insolvency and originator from legal action from investor.
• What further considerations?

  • volatility of the industry.
  • Ensure banks involved can meet basel recommendations, such as capital adequacy and enhanced disclosure
• FRN produced from securitization:

  • tranched, give potential investors a menu.
  • 1st tranche has lower interest rate and last tranch is higher risk but higher rate.
  • This protects investor interest by the spv.
  • Rating agencies will rate the FRN based on cash flow quality, vital to strengthen with guarantee.
• Tax concerns?

  with FRN, investors will receive net amount after tax deducted from coupon payments if completed in UK
• What is the function of securitisation?

  Lowers the cost of funds by isolating risks.

  Investors buy a specific set of receivables with a known amount of risk.
• Benefits of securitisation to banks?

  Banks can raise own turnover of assets rather than the volume of assets.

  Removal of assets from banks balance sheets, leading to improvement in financial ratios
• Separate legal personality mans that a court cannot look behind ownership of company buy several situations where this may be done:

  • Public interest
  • lifting veil to prevent evasion of obligations
  • lifting the veil in group situations