CFM20030 - Securitisation: basic structures: true sale/asset-backed securitisation
Basic structure: true sale securitisation
The originator sells a homogenous set of assets that have a
predictable stream of income. Examples include a rental income
stream, mortgage debts and credit card debts.
This is a genuine sale with title passing to the issuer SPV.
The SPV is usually entirely separate from the originator. The
commercial reason for the sale to this separate entity is to
protect the third party investors against any claims being made by
creditors of the originator. Also, it enables the regulators and
credit ratings agencies to assess the financial and commercial
status of the Issuer without any reference to the status of the
originator. The Issuer SPV is usually described as
‘bankruptcy remote’, as the liquidation of the
originator will not impact on the assets and their income stream in
the SPV. See the diagram at
CFM20030a.
The separation of the SPV from the originator also means the
third party investors have no recourse to the originator if the SPV
is unable to meet its liabilities to them, aside from any separate
security or credit enhancement arrangements included in the
securitisation (
CFM20050).
The SPV acquires the underlying assets from the originator at
an arm's length price. One reason for this is to prevent the
originator’s creditors from being able to challenge the sale
of the assets as a ‘preference’, should the originator
go into liquidation.
The SPV raises finance by issuing bonds on the commercial
market. These bonds are usually given a credit rating by the credit
rating agencies.
The SPV is basically a conduit for raising funds and using
cash flows from the securitised assets to pay interest and
instalments of principal on the funding and incidental costs. Any
amounts that remain in the SPV after making all of these payments
will normally be utilised:
- to retain a nominal residual profit for the SPV, and
- if there is then still any remaining cash, to pay it to the originator as interest on subordinated debt, or as deferred consideration, or by some other mechanism (a process commonly referred to as profit extraction ( CFM20050)).
The tax position of the SPV is considered in more detail at CFM20060.
Servicing agreement
The customers will be probably unaware that their debt has been ‘securitised’. Generally, the originator will enter into a servicing agreement with the asset-holding SPV, whereby the SPV pays a regular fee to the originator to continue servicing the underlying asset pool such as collecting the income, managing the SPV’s cashflows on its assets and funding, and pursuing defaulted debts. This has advantages for both originator and SPV:
- it enables the originator to retain the customer and the openings for possible further business, and
- it is the originator who has the expertise and organisation to ‘service’ the assets. In particular, the originator will have the computer systems that are required to carry out the cash management and to monitor the performance of the securitised assets (thereby identifying any need for debt collection),
