3.4 Management of Working Capital 59- the risks in the original assets are removed from the originator;
- if the assets are bank loans, the originator has reduced its lending exposure and
is thus permitted by banking regulations to make further loans; - the assets have been transformed into tradeable asset-backed securities; and
- the credit quality of the asset-backed securities is solely based on the character-
istics of the asset pool and not related to the creditworthiness of the originator.
In a funded synthetic securitisation process, the ownership of the asset pool is not
transferred to the SPV, but remains on the balance sheet of the originator. The
risks associated with the asset pool are nevertheless transferred to the SPV by
means of a credit derivative.
Reasons to use securitisation. The firm (the originator) can benefit from
securitisation in many ways.^144 The benefits of securitisation range from balance
sheet considerations to risk transfer (for the management of risk through special
purpose vehicles, see Volume II).
Availability. As the securities are legally issued by an SPV rather than by the
firm itself, securitisation can be used not only by listed companies but also by
unlisted public limited-liability companies, private limited-liability companies,
public sector entities, and other legal entities with a sufficiently large pool of
homogeneous assets that generate income.
Balance sheet. One of the principle benefits of securitisation is to remove the
securitised assets from the originator’s balance sheet, with the proceeds then
appearing as cash. Balance sheet considerations play an important role in
securitisation.
Cost. In principle, securitisation might help the firm to reduce the cost of
funding. The purpose of securitisation is to convert cash flows from underlying
assets or receivables due to the entity that owns them into a smooth and
predictable repayment stream. Securitisation can help the firm to obtain a higher
credit rating for the asset-backed securities issued by the SPV and lead to a lower
cost of funding through credit arbitrage.
First, the asset-backed securities may be regarded as a better credit risk than the originator
itself. Second, the originator may be owed debts by other companies that are regarded as a
better credit risk than the originator itself. If the originator can borrow money solely against
the credit risk of those receivables it will, in theory, be able to borrow more cheaply than if
its lenders have to take the risk of the originator’s own default as well as any risk involved
in the receivables. Third, the asset-backed securities may be a better credit risk than the
firm’s financial intermediaries (banks and other lenders). Fourth, tranching (see Volume II)
and the use of the equity technique (section 5.1) will enable price segmentation of
securities.
Regulatory capital. For banks and financial institutions, securitisation can be a
way to manage regulatory capital. Modern banks package loans as tradeable
(^144) Ibid, paragraph 6.32.