Securitisation is a financial structure which enables financial institutions (banks, insurance companies) to refinance themselves by transforming receivables, by definition non-liquid, into negotiable shares and offer investors standard investments with attractive returns and maximum security. This transformation takes place via an ad hoc vehicle, a "Fonds Commun de créances, FCC" -a fund-, which purchases the receivables and in exchange issues the equivalent in shares. In this way, Securitisation is a "financial technique by which loans to clients are not financed by the distributor but directly by the capital markets, i.e. the investor" (Denise Flouzat, member of the Council on Monetary Policy). However, only sound receivables may be refinanced in this manner.
From an economic standpoint, this transaction has three advantages. The seller entity can immediately ascertain future portfolio margins, as Securitisation is seen as a complete sale even if the seller holds subordinated shares. Furthermore, it enables the reduction of the regulatory constraints on equity and refinancing. Lastly, it enables companies to diversify their financing sources, as can be seen from the success of the Compagnie Bancaire which, by using this structure, obtained more than 10 billion francs in resources during the first six months of 1994, of which 6.5 billion were obtained from the United Kingdom.
In implementing such a transaction, which is highly remunerative in times of low interest rates, one should not however overlook the potential negative effect on the operative income of the seller. The Securitisation of assets at high rates can entail a substantial loss margin in the reinvestment of the resources which previously financed the assets.
Introduced in France by a law of December 1988, Securitisation did not meet with the success that was expected on the markets, mainly due to the restrictive nature of the law compared with those applicable in the United States. The law was gradually softened by a decree of March 27, 1993, a decree of November 1993 and a law of December 1993, introducing certain amendments:
- FCC are now permitted to purchase receivables of less than two
years' maturity. Only the Securitisation of receivables which are
doubtful or subject to litigation, together with bank overdrafts
or cash facilities, remains forbidden,
- an FCC may be replenished with new receivables, although they are
still forbidden after their constitution from borrowing or issuing
- FCC are permitted to contract Interest Rate Swaps (IRS),
- it is now possible, by means of written notice to the debtor,
for the seller to delegate the collection of receivables to another
institution (this condition must be stipulated in loan contracts
signed after January 1, 1995).
These changes to the regulations, together with the fall in interest rates which has made these transactions more attractive, have given rise to a marked increase in Securitisation transactions during the financial year 1994. It should be pointed out, however, that together with the softening of the regulations, two rulings of the Banking Regulation Committee ("Comité de la Réglementation Bancaire") dated December 1993, redefined the accounting and prudential treatment of such transactions. The main development, apart from the definition with regard to the accounting for guarantees, concerns the prudential treatment of these transactions. In the future, "guarantees of any kind granted by a credit institution to protect bearers of shares in an FCC(..( from default of debtors with regard to the receivables transferred", are deemed to be deductible, after provisions, from prudential equity. This deduction, limited to 8% of the weighted amount of the Securitised receivables and which concerns only transactions realised after July 1, 1994, neutralizes, in prudential terms, classic Securitisation techniques. Other forms of outside guarantees, in particular the technique of credit rating enhancement, will in future be privileged.
In conclusion, the changed regulations should lead to a further increase in Securitisation. The Securitisation of revolving credits launched by the Crédit Lyonnais in December 1994, the first of its kind in Europe, thanks to the replenishment facility, is promising for the future.
The only means of putting investors at ease and ensuring the success of the technique is for management companies to publish prepayment rates and default rates on a six-monthly basis, and for market makers to provide liquidity on a secondary market as they do for the bond market.
For more information, please contact Olivier Drion or Ghislaine Mattlinger on 33-1 42 91 08 16.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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