International Finance and Accounting Handbook

with attractive returns. For borrowers, securitization provides an alternative funding
source with lower costs of funds compared with other forms of financing. By play-
ing a role in improving the efficiency of the financial system and increasing credit
availability, securitization is an integral and vital part of today’s economy.
A typical securitization transaction is structured in Exhibit 21.1.
In a typical asset-backed securitization, the transferor (also known as the “spon-
sor” or “issuer”) bundles together financial assets (e.g., accounts receivable or loans)
from a number of customers (or borrowers). The sponsor then forms a special-pur-
pose entity (SPE) (sometimes referred to as a special-purpose vehicle or a special-
purpose company) to buy the assets from the sponsor. In most structures, a second
transfer of the assets to a trust occurs and the trust issues the asset-backed securities.
It is the combination of the two entities and transfers (a two-step transaction) that
typically is necessary to accomplish legal isolation.
The issuance of the asset-backed securities provides funds for the purchase of the
receivables from the transferor. Such securities are in the form of beneficial interests
in the receivables or the cash flows the receivables will generate and, accordingly, are
backed solely by the assets in the trust due to the legal isolation. Beneficial interests
may comprise either a single class of securities having debt or equity characteristics
or multiple classes of interests, some having debt characteristics and others having
equity characteristics. The sponsor also may retain an interest in the assets transferred
(e.g., the residual interest) and may service the receivables, performing such duties
as collecting principal and interest from the customer (or borrowers), investigating
delinquencies, foreclosing and liquidating collateral of defaulted loans and remitting
principal and interest to the asset-backed security holders, guarantors, trustees or oth-
ers that provide services for the structure.
The following list contains terms commonly employed in securitization transactions:

• Beneficial interests:Rights to receive all or portions of specified cash inflows
  to a trust or other entity, including senior and subordinated shares of interest,
  principal, or other cash inflows to be “passed-through” or “paid-through,” pre-
  miums due to guarantors, commercial paper obligations, and residual interests,
  whether in the form of debt or equity (FASB Statement No. 140, paragraph 364).

21 • 2 ASSET SECURITIZATION

Exhibit 21.1. Typical Securitization Transaction.

Transferor

Investors

TRUSTTRUST

SPECIAL

PURPOSE ENTITY

SPECIAL

PURPOSE ENTITY

TRANSFERTRANSFER

OF ASSETSOF ASSETS

ASSETASSET--

BACKEDBACKED

CERTIFICATESCERTIFICATES

TRUE SALETRUE SALE

OF ASSETSOF ASSETS

TRANSFERTRANSFER

OF ASSETSOF ASSETS

ASSETASSET--

BACKEDBACKED

CERTIFICATESCERTIFICATES

TRUE SALETRUE SALE

OF ASSETSOF ASSETS

$$

$$

$$