The objectives of this article are to define a securitization and describe its major features; to highlight some of the benefits of a securitization, as well as the critical factors for completing a successful securitization for consideration from originators; and to identify who the actors are.
Since the mid-1970s, the financial world has been the recipient of several innovations. One of them was securitization, which began to take shape in the 1980s. This financial practice began with the support of the United States government in 1970, and private sector organizations implemented it in 1977. Since then, securitization has become a significant finance tool. By the second quarter of 2008, it had generated $10.2 trillion in the United States and $2.3 trillion in Europe. By 2005, Asset Based Securities (ABS) issuance was measured at $1.9 trillion, and the amount of issued equity is $18.2 trillion in the U.S. ABS issuances are 11 percent of equity issuances.
In Turkey, the securitization market began to develop in the second half of the 1990s. Regulation of securitization in Turkey is mainly based on the applications in the United States. Between 1992 and 1997, the ratio of ABS issuances to total issuance of securities was 55 percent; the ratio of the total secondary market trading volume has been 0.4 percent. The Capital Markets Board (CMB) is the regulatory and supervisory authority in charge of the capital markets in Turkey, and the main laws governing securitization are issued by the Capital Markets Board (CMB). The Communiqué on the Principles of Asset Covered Bonds and Asset Based Securities is published in the Official Gazette to regulate securitization.
Securitization is a method of providing a source by transformation of an illiquid asset into a security. This system is based on the receivables that have a low default risk and a high turnover. Liquidation of the assets and creation of the new sources are the results of this financial practice. Securitization can be classified in two groups, depending whether or not the receivables are taken out from the firm's balance sheet of the firm; doing so is much more advantageous. Examples of countries that take out assets from the firm's balance sheet include Germany and Denmark. However, risk insulation and special purpose vehicles (SPVs) are not included in these regulations.
Securitization is a multistep process that involves the participation of several parties, which consist of the originator, SPV, fund organizer, servicer, and investment bankers. As the owner of the receivables, the originator creates a pool of the receivables and transfers them to an SPV through a written assignment agreement. This is the system of receivables that are taken out of the firm's balance sheet. Thus the originator provides the needed supplies with a transfer fee without waiting for the maturity of receivables.
From a legal standpoint, the transfer of receivables to SPVs is essential. The SPV is needed for taking over the receivables, carrying out the tasks of collection and payment, and other related activities. Once the assets are transferred to the SPV, there is usually no recourse to the originator. If the originator goes into bankruptcy, the assets of the SPV will not be distributed to the creditors of the originator. To achieve this, the governing documents of the SPV restrict its activities to only those necessary to complete the issuance of securities.
In addition to primary players, obligors, servicers, and agents are also involved in a securitization transaction. A servicer collects payments and monitors the assets that collectively function as the main point of the structured financial deal. Also, the regulations define some credit enhancement mechanisms that originators can apply. Credit enhancement is the method used to improve the credit profiles of a structured financial transaction. It is a key part of the securitization transaction in structured finance, and it is an essential tool for credit rating agencies when rating a securitization. The fund can enter into insurance, letter of guarantee or other security arrangements with another third party.
Ultimately, as a result of the aforementioned developments, securitization is currently one of the most important methods of financing for companies. Applied in the ideal manner, securitization provides a multitude of financial benefits.
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.