60 3 Reduction of External Funding Needs
securities and sell them on rather than hold loans on their books. Exposures related
to securitisation have been dealt with in Chapter IV of the Basel II Accord.
This aspect of securitisation was partly to blame for the subprime mortgage crisis. Banks
used securitisation to pass on credit risk to investors. Securitisation weakened banks’
incentives to monitor the quality of the mortgage loans they wrote. This lead to degraded
credit quality. After the subprime mortgage crisis, it was believed that credit quality could
be increased by making originators hold on to a greater proportion of assets or the equity
tranche of bonds issued by the SPV.
Risk transfer. Securitisation can generally be used as a risk management tool. It
enables the originator to transfer the risk inherent in future cash flows to investors.
The allocation of risk and income is a matter of contract. The originator can
transfer risk completely or partially. The same can be said of the transfer of
income. For example, the parties may agree that the originator will continue to
retain the benefit of the surplus income from the assets and must only bear losses
up to a pre-determined limit.
Other reasons. There may also be other reasons to use securitisation. This can
be illustrated with the case of English football clubs.^145
English football clubs are high-risk firms that need to invest in football stadiums.
Shareholders’ capital is expensive. An alternative to shareholders’ capital is to borrow from
banks. However, there is a problem. Banks will ask for a relatively high interest rate to
reflect the high risk of lending to football clubs. They will also typically want to restrict the
loan period to between 5 to 10 years. Banks will also want security for their loans as well as
a suitable range of financial covenants, which would hamper managerial freedom. The
restrictive nature of bank borrowing and the relatively limited availability of bank lending
have meant that clubs have been willing to consider other options such as securitisation. IN
theory, securitisation could bring many benefits. It could: lower the costs of borrowing;
offer longer-term loans (for example, up to thirty years); encourage investment from a
wider range of investors; and offer the clubs’ directors more managerial freedom than
would be the case with typical bank covenants. With the availability of long-term
securitised funds, clubs would no longer have to finance their capital investment by short-
term bank loans, but could match their long-term debt obligations by long-term revenue
streams (mainly from gate receipts). Working capital could therefore be used to finance
shorter-term investments such as buying new players.
Overview of Legal Problem Areas
Securitisation is a large and complex area of legal practice which raises numerous
legal problems.^146 The structuring of the transaction should address them (for
structuring, see below). Generally, legal problems can relate to the following as-
pects. Some of them will be discussed in more detailed on the following section.
(^145) See Burns T, Structured Finance and Football Clubs: An Interim Assessment of the Use
of Securitisation, Entertainment and Sports L J, December 2006.
(^146) For risk management, see Basel Committee on Banking Supervision, Asset Securitisa-
tion. Supporting Document to the new Basel Capital Accord (January 2001) (Second
Consultative Paper).