Securitisation

How does it work?

Securitisation is a financial technique that consists of transferring financial assets such as receivables to investors. It is done by converting the assets into financial securities issued on the capital markets.

Practical details:

1. Securitisation is intended for any business with receivables: invoices, consumer loans, rents, mortgage loans, insurance and health care receivables, royalties, tax receivables, etc.;
2. Securitisation can occur in two ways:
   • Classic securitisation: technique with transfer of ownership. Ownership of the receivables is transferred to the securitisation undertaking via an assignment contract;
   • Synthetic securitisation: technique without transfer of ownership. Ownership of the receivables is not transferred to the securitisation undertaking. Only the credit risk associated with the receivables is assigned.
3. The receivables are sold to this end to a securitisation undertaking, the Special Purpose Vehicle (SPV). The SPV then refinances itself by issuing negotiable securities;
4. The securities (bonds, commercial paper, etc.) each represent a fraction of the portfolio of securitised receivables and entitle the investors to receive payment of those receivables (when the invoices are paid, for instance, or when the mortgage loans are redeemed in monthly instalments) in the form of interest and principal repayments;
5. The interest rate offered to investors is linked to the level of risk of the underlying receivables.

Advantages

• Diversify your sources of finance: you retain your capacity to call on bank loans or additional equity.
• Conversion of non-liquid assets into liquidities: securitisation is also a balance sheet management tool in that it allows you to remove assets from your balance sheet to bolster your liquidities.
• Risk transfer: if the portfolio turns out to be of permanently poor quality, it is the investor who suffers any financial loss. Mechanisms are in place, however, to limit the investor’s exposure.

Good to know

• It is vital to involve your relationship manager and a securitisation expert as early as possible in the analysis of your strategic options.
• Securitisation is a complex process that involves a substantial number of parties. Apart from the bank, a securitisation operation requires the intervention of independent legal advisers and financial rating agencies (at least two), which publish a high-quality risk rating on the issued securities.
• The procedure as a whole takes about twelve weeks from the start of the operation to the placement of the securities with investors.
• The process involves the completion of several studies (due diligence) to verify the SPV’s capacity to generate sufficient cash flow to meet its obligations towards the investors placing their trust in it. This due diligence is, after all, the sole guarantee available to the investor that the SPV will be capable of paying the interest on the securities it has issued and of redeeming them at maturity.
• The securities issued by the SPV are securitised exclusively via the SPV’s assets, which is why a specific SPV is created for each securitisation operation. In the event that the SPV’s assets prove insufficient to cover the risk, it might be necessary to reinforce the portfolio structure through the addition of collateral.
• The cost of securitisation consists of a fee to cover the expenses incurred by the operation. These are mostly amortised over the entire life of the transaction to maintain its economic attractiveness.