Securitisation allows you to raise finance for your business by selling assets or income streams into a special purpose vehicle (SPV). Securitisation is the process of pooling the assets - typically small assets that it wouldn't be possible to sell individually - and the SPV is the legal entity created by these bundled assets.
The SPV then raises money for your business to pay for these assets by issuing secured bonds. Usually assets sold into an SPV have some form of regular income - such as royalties, regular payments from customers or other ongoing revenues.
This method of raising finance is often used by businesses in non-financial sectors to support bond issues and raise cash for expansion, acquisition or to reduce bank debt. These sectors could include:
- logistics
- utilities
- leisure
- healthcare
- intellectual property
Securitisation is suitable for a wide range of businesses, as long as they have an asset or collection of assets that:
- can demonstrate regular and consistent cashflow
- can be bundled together and sold into an SPV
Advantages of securitisation
Usually, securitisation is used for raising large amounts of funding and can be advantageous to your business if you are looking for investment. For example:
- the SPV is entirely separate from the originating business
- generally, the interest rates payable on securitised bonds sold by an SPV are lower than those on corporate bonds
- private companies get access to wider capital markets - both domestic and international
- shareholders can maintain undiluted ownership of the company
- intangible assets such as patents and copyrights can be used for security to raise cash
- the assets in the SPV are protected, even if your business gets into financial problems - which reduces the credit risk for investors
- an SPV usually has an excellent credit rating - so regulated investors (such as insurance companies and pension funds) will find it easier to buy bonds than from a private company
Disadvantages of securitisation
There are also some disadvantages to consider. For example:
- it can be a complicated and expensive way of raising long-term capital - though less expensive than full share flotation
- it may restrict the ability of your business to raise money in the future
- you could lose direct control of some of your business assets - this may reduce your business' value in the event of flotation
- it may cost you substantially if you want to take back your assets and close the SPV
See more on business assets.
FAQs
Disadvantages of securitisation
it may restrict the ability of your business to raise money in the future. you could lose direct control of some of your business assets - this may reduce your business' value in the event of flotation. it may cost you substantially if you want to take back your assets and close the SPV.
What are the risks of investing in securitized assets? ›
Bad debts arise when borrowers default on their loans. This is one of the primary risks associated with securitized assets, such as mortgage-backed securities (MBS), as bad debts can stop these instruments' cash flows. The risk of bad debt, however, can be apportioned among investors.
How does asset securitization helps in raising capital? ›
Asset securitization is helping to shape the future of traditional commercial banking. By using the securities markets to fund portions of the loan portfolio, banks can allocate capital more efficiently, access diverse and cost- effective funding sources, and better manage business risks.
What are the disadvantages of asset based financing? ›
Cons
- Certain assets may not qualify as collateral. Some of your business assets may not be eligible collateral for an asset-based loan — and ultimately, this determination will be made by your lender. ...
- Additional fees. ...
- Putting your assets at risk.
The problem is that there is virtually no secondary market for individual leases. But by pooling those leases, the company can raise cash by selling the package to an issuer, which in turn converts the pool of leases into a tradable security.
Why is securitization risky? ›
Risks: Since securitization is a structured transaction, it may include par structures as well as credit enhancements that are subject to risks of impairment, such as prepayment, as well as credit loss, especially for structures where there are some retained strips.
What do the advantages of asset securitization include? ›
As mentioned at the beginning, the process of asset securitization offers multiple benefits, among which the following stand out:
- Improved liquidity and access to alternative financing sources.
- Customization of securitized assets.
- Diversification of investments.
- Step 1: Personalized study and ETP design.
Probably the biggest factor that led to the problems in the securitization market were artificial demand created by bank capital rules favoring highly rated securities over whole loans. That artificial demand found a home in residential mortgage securities thanks to the GSEs' loose underwriting and easy money.
Who benefits from securitization? ›
Indeed, thanks to years of experience and market reforms, securitization benefits lenders and borrowers alike and helps global capital flow in the U.S.
Is securitization good or bad? ›
Securitizing is not an inherently good or bad thing. It is simply a process that helps banks turn illiquid assets into liquid ones and frees up credit.
At each stage of the loan and securitization process, securitization encouraged market participants to push risk to the very edge of what the applicable market standards would tolerate, to make the largest, riskiest loans that could be sold on Wall Street, to bundle them using the fewest credit enhancements rating ...
Why would firms want to engage in securitization? ›
Benefits of Securitization
By reducing their debt load and risk, banks can use their capital more efficiently. The securitized instruments created by pooling the debt are known as collateralized debt obligations (CDOs). The securitization process creates additional liquidity for debt instruments.
What is a beneficial interest in securitized financial assets? ›
The beneficial interests take the form of either notes or trust certificates, which are sold to investors and/or retained by us. These beneficial interests are collateralized by the transferred loans and entitle the investors to specified cash flows generated from the securitized loans.
What assets are suitable for securitization? ›
Securitization involves taking a group of illiquid, income-producing assets and turning them into a single product that can be invested in. Pretty much anything with a stable cash flow can be securitized and turned into an asset-backed security (ABS). Classic examples include auto, student, and home loans.
