Reasons why organizations go for securitisation - Management Duniya

Reasons why organizations go for securitisation

Securitisation is one way in which a company might go about financing its assets. There are generally seven reasons why companies consider securitisation:

1. to improve their return on capital, since securitisation normally requires less capital to support it than traditional on-balance sheet funding;


2. to raise finance when other forms of finance are unavailable (in a recession banks are often unwilling to lend – and during a boom, banks often cannot keep up with the demand for funds);


3. to improve return on assets – securitisation can be a cheap source of funds, but the attractiveness of securitisation for this reason depends primarily on the costs associated with alternative funding sources;


4. to diversify the sources of funding which can be accessed, so that dependence upon banking or retail sources of funds is reduced;


5. to reduce credit exposure to particular assets (for instance, if a particular class of lending becomes large in relation to the balance sheet as a whole, then securitisation can remove some of the assets from the balance sheet);


6. to match-fund certain classes of asset – mortgage assets are technically 25 year assets, a proportion of which should be funded with long term finance; securitisation normally offers the ability to raise finance with a longer maturity than is available in other funding markets;


7. to achieve a regulatory advantage, since securitisation normally removes certain risks which can cause regulators some concern, there can be a beneficial result in terms of the availability of certain forms of finance (for example, in the UK building societies consider securitisation as a means of managing the restriction on their wholesale funding abilities).

Establishing the primary rationale for the securitisation activity, is a vital part of the preparation for a securitisation transaction, since it influences the sorts of administrative tasks which need to be developed as well as the transaction structures themselves.

Tags: Assets, Balance, Balance sheet, Cost, for, go, organisations, reasons, Securitisation, Sheet, why
By: Management Duniya