Part One
These notes will be a series of short articles on “securitization” as a form of financing. The purpose is to familiarize my readers with this manner of raising funds through a “securitization transaction”, which really is a cluster of related transactions.
As a way of sourcing funds from the capital market, securitization has its many benefits, but securitization has not flourished in the Philippines, even if the Securitization Act has been in place since 2004. So the intention here is for more people to get familiar with the securitization concept, and understand how “securitized products” work as investment vehicles. Expectedly, some are more familiar and some are less familiar with securitization, but the idea is to make the word a regular part of our common business vocabulary.
The Securitization Act of 2004 (Republic Act 9267) provides the legal and regulatory framework for securitization to implement “the policy of the State to promote the development of the capital market by supporting securitization”. The law then defines: “Securitization means the process by which assets are sold on a without-recourse basis by the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the SPE which depend, for their payment, on the cash flow from the assets sold and in accordance with the Plan [Section 3 (a) of the Act]”.
The securitization transaction starts with an Originator, a person or entity that is an original obligee, which lends to an original obligor. The originator would typically be an entity that has generated loans or receivables or other similar financial assets with an expected future cash-payment stream. For example, the originator could be a property developer (with receivables from its installment sale of properties), or a bank (with loan receivables), or a car dealer (with receivables from its installment sales of cars), or a credit-card company (with its receivables from credit -card holders).
To pursue the securitization transaction, the originator would sell its receivables or financial assets to a special purpose entity (SPE) or special purpose vehicle (SPV), which must be a “true and absolute sale of assets.”
This SPE or SPV, which is a juridical entity or a duly licensed trust entity, is created solely for the purpose of securitization.
The SPE/SPV, in turn, issues securities to investors, who purchase these securities on the promise by the SPE/SPV that these will be paid back with some return (or interest). The SPE’s promise is backed by the receivables or financial assets which are the source of the income streams that are used to pay the obligations/future payments to the investors. In other words, the originator’s receivables—sold to the SPE—have been transformed to securities obligations of the SPE, now held by different investors. The receivables have
been securitized.”
In the meantime, the originator has received the payment for its sale of receivables/financial assets to the SPE. The originator has for now “cashed in” its receivables/financial assets, from the sale process of the “securitized” financial assets, through the “structure” of an SPE. Securitization is, therefore, referred to sometimes as “structured finance”.
An important feature of securitization is that the sale of the financial assets by the originator to the SPE must be a true and absolute sale of assets. This is meant to protect the investors of the securitization issue, who depend on the income streams from the pool of financial assets transferred to the SPE. The creditors of the originator should not have any access to the financial assets transferred to the SPE, in case such creditors wish to seek other assets of the originator for payment to themselves, as when bankruptcy of the originator occurs. The industry calls this a “bankruptcy remote” requirement.
This, then, is the basic description of a securitization transaction and the main participants: (a) an original transaction creating a debt obligation generating future income streams, initiated by an entity (the original obligee), aptly called the Originator; (b) an SPE/SPV to whom the financial assets (which generate the future income streams) are sold/transferred by the originator, and this SPE/SPV issuing and selling securities against/backed by these financial assets; and (c) the Investors who purchase these so-called
asset-backed securities.
But there are, of course, other participants to the securitization transaction. They will be described in the subsequent articles. To be continued
