Scrutinization

Securitization is the process of creating asset-backed securities, which are debt instruments that are backed by a stream of cash flows. Some examples of assets that may be securitized include residential and commercial mortgages, real estate leases, consumer assets such as personal loans and credit card receivables, commercial loans, and trade receivables.

The act of securitization involves converting the cash flow or income stream from these assets into a current lump-sum value, effectively bringing future income into the present for immediate use. Because securitization relies on future income, most securitizations are underwritten or insured to mitigate the risk for investors.

To create asset-backed securities, the assets to be securitized are first sold or transferred to a special purpose vehicle (SPV), a company that is created specifically to isolate the assets from any claim or repayment obligation of the end borrower. The SPV then issues bonds or other debt instruments to raise funds, which it uses to pay the ultimate borrower for the assets.

The borrower is able to raise money without risking any assets other than those held by the SPV, and in return receives a lump sum. The debt is also kept off the borrower’s balance sheet, as the SPV is responsible for repaying the debt.

Securitization can be a valuable financial tool for organizations, as it allows them to use future income streams as assets in the present. It also allows for cheap, non-recourse borrowing off-balance sheet, and can be economically viable for contracts of at least $4 million. In addition, securitization can be effectively used in debt restructuring strategies. Nioglow Co Limited offers bespoke securitization solutions to help clients raise money efficiently and economically.