What is Securitization?
Securitization is a progressive form of financing where a diverse pool of assets with predictable cash flows (eg: equipment leases) is sold from a company to a Special Purpose Entity (“SPE”) that finances the acquisition through the issuance of asset backed notes. The result is that companies are able to access an inexpensive source of funding as the SPE funds through the issuance of highly rated securities.
This type of financing is generally considered more secure for the following reasons:
- The structure is bankruptcy remote so even if the leasing company defaults, the investors still own the leases and are entitled to the cash flows
- Securitization has credit enhancement, usually through the form of reserves that covers a multiple of expected losses
- A backup servicer is in place to step in and wind out the portfolio if the leasing company defaults
- Interest and fees from leases are controlled by the SPE and no proceeds are released to the leasing company until investors receive their interest
As a result, these structural enhancements allow leasing companies to obtain financing rates lower than they normally would through a straight business loan. Today, securitization as a financing tool is commonplace with the majority of the top 50 publicly rated Canadian companies actively employing this form of financing. Assets with predictable cash flows can be securitized. This form of financing works particularly well in the auto and equipment sectors.
Contact Us To Learn More
Daryl Ching, CFA. President, Ubequity Specialty Finance Corp.
t. 416.941.9069 x227