- Financial asset:Cash, evidence of an ownership interest in an entity, or a con-
tract that conveys to a second entity a contractual right (a) to receive cash or an-
other financial instrument from a first entity or (b) to exchange other financial
instruments on potentially favorable terms with the first entity (FASB Statement
No. 140, paragraph 364). - Interest-only strip:A contractual right to receive some or all of the interest due
on a bond, mortgage loan, collateralized mortgage obligation, or other interest-
bearing financial asset (FASB Statement No. 140, paragraph 364). - Qualifying SPE:A special-purpose entity that qualifies for specific accounting
treatment under FASB Statement No. 140. - Special-Purpose Entity: A legal entity with a specific, limited purpose.
- Transfer:The conveyance of a noncash financial asset by and to someone other
than the issuer of that financial asset. Thus, a transfer includes selling a receiv-
able, putting it into a securitization trust, or posting it as collateral but excludes
the origination of that receivable, the settlement of that receivable, or the re-
structuring of that receivable into a security in a troubled debt restructuring
(FASB Statement No. 140, paragraph 364). - Transferee:An entity that receives a financial asset, a portion of a financial
asset, or a group of financial assets from a transferor (FASB Statement No. 140,
paragraph 364). - Transferor:An entity that transfers a financial asset, a portion of a financial
asset, or a group of financial assets that it controls to another entity (FASB
Statement No. 140, paragraph 364).
21.2 REASONS FOR ORIGINATORS TO SECURITIZE. The securitization structure is
intended to provide significant advantages to the originator of the financial asset,
which includes providing an alternative source of funding, reducing cost of funds,
creating risk transparency, and increasing the return on asset and return on equity by
moving the assets and related funding off balance sheet.
(a) Alternative Source of Funding. One of the greatest advantages of securitization
is the creation of tradable securities from illiquid financial claims. In many cases,
originators are limited to a few sources of funds such as unsecured debt, asset-based
funding, or sale/syndication. These types of financing usually carry higher costs than
securitization as it relies on the creditworthiness of the originators rather than on the
financial claims.
Securitization of financial claims also provides the originator with a way to re-
ceive payment for the financial claims earlier than the scheduled collection date of
those financial claims. This helps originators to carry on their business and to gener-
ate new financial claims.
(b) Cost of Funds. In the financial markets, higher-rated debt commands lower
rates. Through the isolation of the financial claims in a “bankruptcy-remote” entity,
asset diversification, tranching, and overcollateralization, securitization provides for
the issuance of highly rated securities and, in many cases, securities that are rated
higher than the originator itself. This tends to reduce the costs of funds to the origi-
nator when compared to traditional forms of financing.
21.2 REASONS FOR ORIGINATORS TO SECURITIZE 21 • 3