securitisation

A means of raising finance secured on the back of identifiable and predictable cash flows derived from a particular class of assets (such as rents, receivables, mortgages or operating properties). Almost any assets that generate a predictable income stream can be securitised. Securitisations will normally take one of two forms: in a basic "true sale" securitisation:

• The owner of the assets (the originator) sells the assets which are to be securitised to a special purpose vehicle (SPV) which pays for them by issuing debt securities to investors on a fixed or floating rate basis.

• The securities may be issued on a public stock exchange or privately.

• The principal and interest payments on the debt are funded out of the cash flows generated by the underlying assets.

• The SPV usually creates charges over the securitised assets to secure its obligation to repay the finance raised. This security is granted in favour of a security trustee mainly for the benefit of the investors.

In a whole business securitisation the cash flows derive not from the repayment of debt or other pre-contracted cash flows or receivables but from the entire range of operating revenues generated by a whole business and a secured loan structure is used.

Related links

cash flow

mortgage

+ securitization

USA

A financial transaction in which receivables or assets that generate cash flow are pooled and purchased by a special purpose vehicle (SPV), which pays the purchase price for the assets and simultaneously issues debt securities sold to investors (the SPV is the issuer in a securitization). The SPV uses the purchase price paid by the investors for the securities to fund the purchase of the assets. The cash flows generated by asset pool are used to pay interest and principal on the securities and are pledged to the holders of the securities as security for their investment. The assets may include:

• Credit card payments.

• Car loans.

• Mortgages.

• Lease payments (cars, aircraft).

• Movie revenues.

• Corporate debt.

The purpose of securitization is to convert illiquid assets into a security that can be sold to investors. Any asset can be securitized if it generates regular cash flow payments designed to guarantee the servicing or timely distribution of proceeds to the security holders. Securitizations typically use an SPV to hold the assets to reduce the risk of bankruptcy by eliminating other creditors.

See also

asset-backed security (ABS)

collateralized debt obligation (CDO)

collateralized loan obligation (CLO)

commercial mortgage-backed security (CMBS)

residential mortgage-backed security (RMBS)