International Finance and Accounting Handbook

writer and issuer coordinate the assembly of a collateral pool and related data. The
rating agencies or financial guarantors then determine the required credit enhance-
ment. The attorneys draft legal and disclosure documents. Exhibit 21.5 depicts the
four phases of a securitization transaction and the primary aspects undertaken in each
phase.
During the evaluation phase, the originator determines whether securitization is
the most appropriate option (e.g., would asset based funding or a sale/syndication
provide better economics?) and identifies any issues that need to be addressed (e.g.,
can the systems provide the required information?). Once securitization is chosen,
the transaction is structured, the optimal assets are selected, and the rating agencies
perform due diligence. It generally takes between eight to sixteen weeks to close a
transaction, depending on such factors as whether the deal is public or private and the
availability of data. The securitized pool of assets will need to be tracked separately
from other assets serviced by the servicer.

21.5 STRUCTURAL ASPECTS. Most securitization structures involve the sale of a
pool of financial claims by the originator to a “bankruptcy-remote,” wholly owned
special-purpose entity in a manner that qualifies as a legal “true sale,”^2 in exchange
for cash and retained interests in the financial claims (generally the residual interest).
The SPE then transfers the financial claims to a trust or other type of special purpose

21 • 6 ASSET SECURITIZATION

Exhibit 21.5. Phases of the Securitization Process.

Close

Transaction

Close

Transaction

Post Closing

Management

And Reporting

Post Closing

Management

And Reporting

Transaction

Preparation

Transaction

Preparation

EvaluationEvaluation

• Establish
  objectives


• Review
  systems/operations


• Identify and
  evaluate
  alternatives


• Identify issues and
  risks


• 
  

  Evaluate asset pool

  
  

   - Structure deal
  
   - Collateral
  
      modeling
  
   - Pricing/initial
  
      marketing
  
   - Due diligence
  
   - Draft legal
  
      documents and
  
      create new legal
  
      entities
  
   - Rating agency
  
      review
  
         - Assets
  
            transferred/flagged
  
         - Certificates are
  
            issued
  
         - Ratings are
  
            provided
  
               - Servicer collects on
  
                  assets and remits to
  
                  trustee; addresses
  
                  delinquencies/defaults;
  
                  and reports collateral
  
                  data to trustee
  
               - Trustee calculates
  
                  cashflow for structure
  
                  and distributes funds to
  
                  certificateholders; and
  
                  enforces provisions of
  
                  governing documents
  
               - Administrator prepares
  
                  books and records and
  
                  tax returns

  
  

(^2) This first step is designed to be judged a true legal sale, in part because the originator does not pro-
vide “excessive” credit protection. In addition, the special purpose entity typically has a board of direc-
tors that is independent of the originator and is not permitted by its charter to undertake any other busi-
ness or to incur any liabilities. Its dedication to a single transaction and the other circumstances
surrounding it makes it extremely unlikely that it would enter bankruptcy and, even if it did, that a re-
ceiver could reclaim the transferred assets. This transfer is intended to legally isolate the transferred as-
sets from the transferor/originator.