Securitisation : a replacement for traditional forms of business lending

Abstract

In a very basic sense the process of securitisation involves the legal and beneficial ownership of financial assets that generate regular streams of income being transferred from the creditor who owns those assets (known as the Originator) to a distinct and separate entity (the Securitisation Vehicle alternatively known as the Special Purpose Vehicle or Entity) that is bankruptcy remote from the Originator and has been created specifically for the securitisation transaction. The sale must be a "true sale", that is to say, it cannot be a camouflaged financing agreement whereby the Originator receives financing in return for the assets being given as collateral. The sale is made for a consideration, either a price or protection insurance. In order to generate the consideration for the transfer of the cash-flow generating assets, the Securitisation Vehicle issues notes that are then sold to investors whether through public procurement or private placing. Securitisation started off in the United States in the mid-1980s when mortgage banks sought to obtain financing for their operations. It evolved from the basic principles of factoring and discounting of debts where the owners of monetary, relatively long terms assets sell off those assets at a discount in order to obtain immediate cash. The evolution came about since factoring and discounting of debt transactions do not eliminate the risk of recourse to the purchaser in the case of the seller going bankrupt. As a process, there is no restriction on the industries where securitisation can be applied as a mode of generating finance insofar as there are assets producing cash-flows and the owners of those assets want to generate funding with the added bonus of shifting those assets of their balance sheet, thus being able to take on more cash-generating assets. The cycle can take place over and over for as many times as need be, the only concern being the demand for the investments issued by the Securitisation Vehicle to finance the process.