Securitization
Securitization is the creation of asset-backed securities. These are debt securities that
are backed by a stream of cash flow. Typical debt securities may include; Residential &
Commercial Mortgages and Real Estate Leases Consumer Assets such as Personal
Loans, Vehicle Hire Purchase and Credit Card Receivables Commercial Loans Trade Receivables
The act of Securitization is the taking of the cash flow or income streams
throughout 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 Securitizations are
underwritten or insured. Assets to be securitized are first sold (or transferred) to a
special purpose vehicle company (SPV) 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 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. Securitization can therefore be
seen as a way of selling off a stream of cash flows.
Securitization also has benefits for investors. It widens their choice of
available investments. The asset-backed securities created by Securitization may also be
easier to analyze as investors need only evaluate
the cash flows from a small pool of assets, instead of a whole complex business. The assets
most often securitized are loans of one kind or another which are usually (when pooled, not
individually) a low-risk investment.
Securitization is a valuable financial tool for any organization.
It
allows the principal to use future income streams as today’s assets.
It allows for
cheap, non-recourse borrowings off-balance sheet
and becomes economically viable for contracts over a minimum of $4m. Securitization can also
be effectively employed in debt restructuring strategies. Orion Capital Group can
structure bespoke solutions to achieve the objective.
Fast, efficient, and economical. To find out how we can help you raise money contact us in
confidence and our experienced partners will be able to answer your questions and offer you
the right advice.