What Is Securitisation And Its Uses Finance Essay

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“If you think you can go it alone in today’s global economy, you are highly mistaken” Jack Welch, CEO of General Electric, USA [1] Securitization is considered one of the most prominent developments in international finance, and is its utility is expected to rise further in the future. [2] Securitization has been defined as “the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors.” [3] The concept of securitization typically offers investors higher quality assets due to the fact that the structure created is insulated from the bankruptcy risk of the Originator. The Special Purpose Vehicle (hereinafter “SPV”) is one such structure. An SPV, or a special purpose entity (SPE), is a “legal entity created by a firm (known as the sponsor or originator) by transferring assets to the SPV, to carry out some specific purpose or circumscribed activity, or a series of such transactions.” [4] SPV’s gained prominence in light of the Enron scandal, where the directors and auditors utilized SPV’s to clear the debts off the balance book of Enron. [5] A SPV is an independent entity, usually created for carrying out a specific project, wherein the SPV purchases assets from the Originator and issues securities against the purchased assets. Such a model provides an investor added security insofar that their investment in the SPV is not subject to any subsequent deterioration in the credit quality of the Originator. [6] Moreover, the investment is secured by the assets of the SPV, or in case of a joint venture, a performance amount. During the course of this paper, the researcher shall endeavor to highlight the advantages of SPV’s in various transactions, with emphasis on the use of SPV’s as an acquisition vehicle and the use of SPV’s for joint ventures. The researcher shall first analyze the concept of a SPV, before dealing with specific issues like the use of SPV’s as an acquisition vehicle and the use of SPV’s by Private Equity firms. SPV’s -The Concept A securitization process typically entails a four step process. First, a SPV is created, which holds the title to the assets underlying securities. Second, the assets held by the Originator are purchased by the SPV, which in turn leads to the third step, i.e. the issuance of securities to the investors which are backed by the assets purchased. The fourth step involves the SPV pays the originator for the assets with the proceeds from the sale of securities. [7] A securitization deal typically involves three parties, namely [8] – 1. The Originator: This is the entity on whose books the assets to be securitised exist. It is the Company that generally owns the receivables. The Company then sells these receivables to a newly formed separate legal entity, which can take the form of a company or a trust.

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