Securitization Vehicles

In the past, securitizations were being abandoned due to the financial crisis. However it is re-surfacing, attracting both investors and issuers alike due to the current global volatile environment.  It is important to take note that these structures are complex and require professional and sound advice and overview of the entire securitization process.  This was hugely supported by Mario Drahi, President of the European Central Bank (“ECB”) as part of an attempt to rebuild the asset-backed securities (“ABS”) securities in Europe.

With today’s regulatory environment in the European Union (“EU”) and Basel III standards consistently being revised to meet the highest regulatory standards, lenders will be pushed to ensure asset quality and their capital to loan ratio meets these regulatory standards.  With securitization, this gives lenders the ability to meet their business goals with these rigid risk and capital controls.  With the means of spreading credit risk, businesses can ensure their loans are in line with the demand from borrowers.

This Insight, lecocqassociate will delve into the fine-details of these securitization vehicles from a legal perspective as well as comparing the structure to a Collective Investment Scheme (“CIS”).

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Definition of Securities Vehicle (“SV”):

Securitization is a financial arrangement that consists of issuing bonds (or notes) backed by a pool of assets. The underlying assets are “transformed” into bonds, hence the expression “securitization.” The value of the bond/note varies with the value of the underlying assets and interests, fixed or not, can be paid at regular interval or not.

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Definition of Collective Investment Schemes (FUNDS):

A collective investment scheme, which is sometimes referred to as a‘pooled investment’, is a fund that several people contribute to. A fund manager will invest the pooled money in one or more types of asset,such as stocks, bonds or property.

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Function of Securities Vehicle (“SV”):

To directly or indirectly:• acquire securitisation assets from an originator by any means; or• assume any risk from an originator by anymeans; or• grant secured loan or other secured facility or facilities to an originator, and finance any or all of the above, directly or indirectly, in whole or in part, through the issue of financial instruments and include any preparatory acts carried out in connection with the above.

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Function of Collective Investment Schemes (FUNDS):

To:

• raise capital from a number of investors with a view to invest it in accordance with a defined investment policy for the benefit ofthose investors; and

• be managed by a third party manager.

• be self-managed.

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Attraction of Securities Vehicle (“SV”):

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Historically to transfer a risk outside of a balance sheet and spread the risk to risk appetite investors. But, more recently, a SV is also used to bridge the gap between direct investment / illiquid investments (i.e. unlisted) and third party managers to mainly:

• Provide liquidity to illiquid assets;

• Package assets;

• Preserve anonymity and distance between an asset and an owner;

• Convert an illiquid asset into a bankable/tradable asset; or

• Ease the listing of illiquid asset.

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Attraction of Collective Investment Schemes (FUNDS):

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An investor invests in a Fund, mainly because he trusts in an investment strategy or a project development to possibly grow its assets.