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Securitisation
Practical Law UK Glossary 3-107-7233 (Approx. 5 pages)
Glossary
Securitisation
For regulatory purposes, a securitisation is a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having all of the following characteristics:
- Payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures.
- The subordination of tranches determines the distribution of losses during the on-going life of the transaction or scheme.
- The transaction or scheme does not create exposures which possess all of the following characteristics:
- the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable exposure;
- the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;
- the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.
A more palatable definition would describe it as a complex financial transaction in which loans or other assets (receivables) that generate a defined or identifiable cash flow are sold by their originator or subsequent owner to (and pooled by) a special purpose vehicle (SPV). This is known as a “true sale” securitisation. The SPV will simultaneously issue debt securities to investors and use the sale proceeds from the issuance to fund its purchase of the receivables.
The principal and interest payments on the debt securities are funded by (and limited to the extent of) the cash flows (both capital and revenue) generated by the receivables. The SPV’s obligations under the debt securities are typically secured by the receivables and their cash flows. This security is granted in favour of a security trustee for the benefit of the investors and other transaction parties.
A less common form of securitisation is known as whole business securitisation. Here, the cash flows derive not from the repayment of debt or other pre-contracted cash flows or receivables but from the entire range of operating revenues generated by a whole business. This type of securitisation uses a secured loan structure (as opposed to a true sale structure).
Almost any asset can be securitised if it generates regular cash flow payments (see Practice note, Types of securitisation: The main asset categories).
For more on securitisation, see Practice note, Securitisation: overview.