regulatory capital constraints by securitizing balance sheet assets. However, off-bal-
ance-sheet CDOs are also used to increase lending capacity and lower funding costs.
Market value structures—as opposed to cash flow structures—trade the underly-
ing collateral to realize positive gains for the payment of liability interest and princi-
pal. Market value structures are “trading portfolios.”
As discussed previously, under FAS 140, the transferor of assets to a CDO that is
a QSPE does not have to consolidate the CDO on its balance sheet. Market Value
CDOs generally will not be QSPEs because of the asset manager’s ability to actively
trade the CDOs assets. In addition, CDOs which purchase assets in the market (as-
sets are not transferred to it) will not be QSPEs. Balance sheet CDOs are often struc-
tured as QSPEs so that the transferor can retain the CDOs equity but still obtain sale
treatment for the assets.
(b) Overview of the Sale of Future Cash Flows. In addition to the securitization of
financial assets (asset backed security [ABS], mortgage backed security [MBS], and
CDOs), various forms of future cash flows such as operating leases or royalties can
be securitized. Funding for these transactions is obtained based on the future cash
flow stream expected. Perhaps the most famous transaction involving the securitiza-
tion of future cash flows was the 1997 “Bowie Bonds” transaction, in which rock star
David Bowie issued $55 million in securities backed by revenues from the future
sales of his early albums.
Since the sale of future cash flows is not a sale of financial assets, the accounting
for such transactions is governed by EITF No. 88-18, “Sale of Future Revenues,” in-
stead of FAS 140. According to EITF 88-18, if the seller has significant continuing
involvement in the generation of the cash flows due to the investor, the proceeds re-
ceived from the sale should be recorded as debt and amortized under the interest
method.
21.9 INTERNATIONAL SECURITIZATION. During 2001, the worldwide ABS mar-
ket was approximately $328 billion with United States issuance accounting for over
75% of the total. However, Europe, which issued over $50 billion in 2001 is now
evolving into a viable and rapidly advancing securitization market as a result of re-
cent legal and regulatory changes and the introduction of the Euro. Competitive and
regulatory pressures on institutions are mounting in Europe, which have led to more
focus on measures such as return on equity (ROE) and on efficient balance sheet
management. As a result, securitization is expected to become one of the most im-
portant sectors in the European banking business.
Japan currently holds the third largest securitization market in the world and has
grown rapidly in the past few years. In 2001, Japanese issuance totaled $22 billion.
Securitization market participants believe Japan has the potential to replace Europe
as the second largest market, but they are of the opinion that there is limited oppor-
tunity in the other Asian countries because the markets are too small.
In Canada, commercial paper conduits have historically been the driving force in
the Canadian ABS market, which was stagnant in 2001. However, market partici-
pants believe that with tightening credit standards at banks, and the possibility of fu-
ture downgrades, securitization is becoming a more important component of Cana-
dian issuers’ funding strategies as Canadian borrowers are denied access to Canada’s
highest-rated corporate commercial paper market.
In Latin America securitization issuance was approximately $7 billion in 2001 with
21.9 INTERNATIONAL SECURITIZATION 21 • 23