Is Collateral Transfer right for your business?
Need advice
from an expert?
The act of ‘securitisation’ is the taking of the cash-flow or income streams over the period of the obligation and rolling it into a current lump-sum value. It is effectively bringing future income into today’s value for today’s use.
Due to this act of ‘relying’ on future income, most securitisations are underwritten or insured.
Assets to be securitised are first sold (or transferred) to a special purpose vehicle company (SPV) in order to isolate them from any claim or repayment obligation of the end borrower. The SPV will then issue Bonds or other debt instruments or obligations. The SPV then uses the funds raised by issuing the debt securities to pay to the ultimate borrower for the assets.
The borrower has raised money without risking assets other than those held by the SPV and it has got a lump sum in return. It has lost some assets or cash flows in return for cash. The debt is also kept off-balance sheet. This is quite reasonable given the limited recourse. Securitisation can therefore be seen as a way of selling off a stream of cash flows.
Securitisation also has benefits for investors. It widens their choice of available investments. The asset backed securities created by securitisation may also be easier to analyse as investors need only evaluate the cash flows from a small pool of assets, instead of a whole complex business. The assets most often securitised are loans of one kind or another which are usually (when pooled, not individually) a low risk investment.
The last of these usually also means that, for the issuer, it is often a cheap way of borrowing.