Securitization

Securitization
See also
Classification of financial markets Acquisition Financing Source of financing Equity instrument Banking book Creation of money Contingent consideration Private equity investments Direct paper

Securitization of assets is a process through which an issuer creates a financial instrument by transforming an illiquid asset such as receivables into securities, in order to sell it to investors. Those instruments are secured by future cash flows connected with asset. The purpose of this transaction can be shortening of collection period at one hand and on the other transferring risk of insolvency. Securitization is a common form of financing an operational business especially among banks.

Structure of process

• Company selects assets to securitization
• Foundation of Special Purpose Vehicle (SPV)
• Assets are transferred to SPV
• SPV is preparing offering of instruments
• Securities are sold to investors
• SPV transfers collected cash to the company

SPV is created to eliminate risk of bankruptcy of the company and because of that to lower interest rates from potential investors.

References

• Acharya, V. V., Schnabl, P., & Suarez, G. (2013). Securitization without risk transfer. Journal of Financial economics, 107(3), 515-536.
• Schwarcz, S. L. (1994). Alchemy of Asset Securitization, The. Stan. JL Bus. & Fin., 1, 133.

Author: Krzysztof Nadzieja