International Finance and Accounting Handbook

The “bankruptcy remoteness” of the financial claims is an important factor in the
ability of the originator to offer the securities at lower rates. The fact that an in-
vestor’s claim over the cash flows of the assets is not exposed to the originator’s other
obligations, which emerge from the originator’s possibly risky ongoing business,
makes it possible for the rating agencies to look to the financial claims quality and
not the originator’s credit quality in assigning ratings. This could be significant in
many cases to companies that carry ratings lower than “AAA” and could raise
cheaper funds through the process of securitization.
As illustrated in Exhibit 21.2, savings from securitization increase as the origina-
tor’s rating decreases. However, it should be noted that the spread saved through se-
curitization could widen or shrink at different points in time as a result of the econ-
omy and the company.

(c) Risk Transparency. The predictable nature of the cash flows of financial claims
allows investors to measure risk associated with their investment more easily and
with greater accuracy. In addition, in many structures, assets and related liabilities
can be matched, eliminating the need for hedges.

(d) Off-Balance-Sheet Financing. In many securitization transactions, the financial
claims and related funding are moved “off balance sheet” and replaced by cash and
other assets. This helps improve the originator’s balance sheet and the financial ra-
tios used to measure the originators’ financial health. For example, securitization al-
lows banks to release capital and reduce the reserve requirements by exchanging
illiquid financial claims, which are considered to be the risky assets, for cash and un-
rated first loss securities. This in turn increases the bank’s lending abilities and, sub-
sequently, its profitability.

21.3 EVOLUTION OF SECURITIZATION. The first securitization transactions date
back to the early 1970s and involved pass-through mortgage securities guaranteed by
the Government National Mortgage Association (Ginnie Mae). In order to promote

21 • 4 ASSET SECURITIZATION

Exhibit 21.2. Savings from Securitization.

500

0

20

70

150

300

B BB BBB A AA AAA

Originator Credit Rating

Amount

Saved

(bp)

Source: Ernst & Young Structured Finance Advisory Services.