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
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.
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