An alternative funding technique with huge potential
Securitisation is the process of converting receivables and other cash-flow generating assets (e.g. bills or royalties) into securities which are then sold to investors in order to generate cash. This funding technique is intended not only for large businesses, but also for a wide range of companies from various branches of industry.
The securitisation process
The securitisation process can be summarised as follows:
- You isolate a pool of assets;
- The pool of assets is sold, pledged or transferred to a legally separate company: a Special Purpose Vehicle (SPV);
- To fund the acquisition of assets, the SPV issues credit-structured notes;
- The notes are placed and traded in the capital markets.
Bringing a pool of more or less homogeneous assets together (‘pooling’) allows you to:
- Make the overall transaction amount large enough to be economically efficient;
- Diversify the number of debt owners.
Term or revolving
The securitisation transaction can be structured as either a term securitisation or a revolving conduit deal.
In a term securitisation, the SPV issues notes - Asset Backed Securities - that will be repaid before a certain date (legal maturity). Pay-downs result from amortisation and repayment observed in the underlying collateral pool.
In a conduit deal, the issuer seeks to refinance a revolving collateral pool through the commercial paper market - hence the name ‘Asset Backed Commercial Paper’.
The different notes (‘classes’) issued under a term securitisation transaction are typically credit-structured notes. They are brought into different ‘tranches’, according to their subordination. Each slice has a different maturity and risk. Securities of the highest rank (‘senior notes’) enjoy priority regarding payment and are protected against credit losses in lower ranks (‘junior notes’). In this ‘waterfall structure’, the proceeds from liquidated assets will first be used to repay the most senior, triple-A rated debt tranche. The remaining proceeds then go to the next most senior tranche (AA), and so on, down to the unrated equity tranche.
Rating agencies will specify minimum levels of subordination to get a particular rating assigned to the notes. Ratings are an important consideration for the issuer in terms of attracting investors.
Three broad categories
Asset backed securities can be broken down into three categories:
Asset Backed Securities
This is the most common securitisation format. Debt is backed by a homogeneous pool of assets, including:
- Commercial receivables: trade receivables, equipment leases, etc.
- Special assets: health-care receivables, royalties, franchise loans, future loans, etc.
- Consumer receivables: car loans, personal loans, mortgages, etc.
Mortgage Backed Securities
Securitised assets include:
- Residential mortgages (prime, first lien, etc.)
- Commercial mortgages
Collateralised Debt Obligations
Most CDOs focus on the corporate sector. They are structured notes backed by a diversified pool of corporate debt (bonds or loans). CDOs are named according to their underlying collateral:
- Collateralised Bond Obligations (CBOs) are backed by high-yield bonds;
- Collateralised Loan Obligations (CLOs) have secured and leveraged loans as collateral;
- Collateralised Synthetic Obligations (CSOs) are backed by synthetic exposure, via credit derivatives;
- Structured Finance CDOs (SFCDOs) are backed by structured products (such as ABS and mortgage-backed securities).
Attractive alternative form of funding?
Securitisation can make sense for different reasons, provided that the asset portfolio is sufficiently large. It allows companies to:
- Access low-cost capital without bank loans, additional equity or restrictive covenants;
- Convert non-liquid assets to cash;
- Diversify funding sources and investors;
- Transfer risk to third-party investors.
The full spectrum of services
BNP Paribas Fortis' securitisation experts serve the requirements of organisations that have sizeable pools of receivables and other cash-flow-generating assets.
BNP Paribas Fortis offers them the full spectrum of securitisation services, including SPV establishment and administration, master servicing, cash management, listing and paying agency services, and custody. We also sponsor one of the largest multiseller ABCP conduits in the world - Scaldis Capital. Using the Scaldis platform means it is not necessary to set up a separate SPV for each company wishing to engage in securitisation.
On the placement side, our fixed-income sales force provides you with access to the major institutional investors.