Financial Glossary – What’s the Meaning of "Securitization"?

Financial Glossary – What’s the Meaning of "Securitization"?

Securitization is the conversion of debt into marketable securities. For example, a mortgage loan can be converted in securities in order to raising money by selling them to other investors.

Securitization is, in other words, a financing technique which allows the company to demobilize claims or future cash flows by converting them into liquid assets and negotiable securities.

Etymology The term “securitization” started to be used at the beginning of the 80’s and comes from the information “security”, originally from the latin “securitas”, in the meaning of “document held by a creditor”.

How does it works? The transaction is configured in its general lines as follows:

1. The originator sells the loans to a special purpose means (SPV) produced especially for this purpose;

2. The SPV purchases the receivables financed by the issuance of its own securities and asset back securities (ABS), related to credits earned;

3. The servicer is responsible for management activities to generate cash flow for repayment of the securities to investors. The servicer is stated the job of paying interest to the debtors.

The company means may not carry out any business activity but only make collections and payments relating to acquired assets.

The transferred credits are assets separate from the originator. The creditors of the transferor company can not claim credit purchased by the SPV for the operation. Only the holders of securities can claim against the assets of the company means.

The role of the bank In securitization, merchant edges can play the role of:

1. Arranger, who structures the transaction by issuing preliminary examination, the impact of risk / return profile for originators and investors, technical features for the release;

2. Trustee who has control over merging parties;

3. Servicer who manages collecting interest on securitized loans sold.

In a world of words, choose and use the right one!

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