Asset Securitisation
Let us study asset securitisation. It is a device of structured financing where an entity seeks to pool together its interest in identifiable cash flows over time. After identification it transfers the same to investors either with or without the support of further collaterals, and achieves the purpose of financing. The end-result of securitisation is financing. However, it is not “financing” per se, since the entity securitising its assets. It is not borrowing money, but selling a stream of cash flows that will otherwise accrue to it.
Let us consider an example. A person wants to own a car to rent it to a business organization. He has to either use his own funds or obtain a loan. He is likely to get rent from the organization for utilization of his car. If He obtains a loan for purchase of the car. The loan is obligation, the car is asset, and other assets and other obligations of the person affect both obligations and assets. If he fails to repay money his other assets may be attached or if he does not pay for other loans his car may be attached. This is the case of financing and obligations under various legal provisions. For the purpose of discussion, we will call this person as an issuer (an appropriate word for him is originator but for simplicity we use the term issuer. Various terms used in securitisation will be discussed later.
In the example studied, it is a claim to value over a period i.e. ability to generate a series of hire rentals over a period. The issuer may sell a part of the cash flow by way of hire rentals for a stipulated time to an investor and thereby raise money to buy the car. The investor is better off, because he has a claim for a cash flow, which is not affected by other obligations of the issuer. The issuer is better of because the obligation to repay the financier is taken care of by the cashflows from the car itself.
Tags: Asset, Financing, Securitisation
By: Management Duniya
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