What is securitization? | Could it help small businesses?

Securitization is a financial practice that enables a company to dispose of the asset or the assets which include mainly loans but also other assets such as real estate, derivatives, etc., through the issuance and placement of bonds with coupons which then become negotiable. Born in the USA in the 70s, especially in the residential building sector, this institution exists in Europe only since 1999. The corporate credit is then sold to third parties and at the time of repayment should theoretically be guaranteed the repayment of principal plus interest coupons. But if the credit becomes uncollectable, the one who bought it securitized loses both.

Money and Ethics - Securitization

Money and Ethics – Securitization

The goods are not sold directly to bond but pass through the securitization company or special purpose vehicle authorized to issue securities that incorporate the assigned claims. These pay the company transferring the figure obtained through the issuance and placement of bonds which will have a rating proportional to creditworthiness. By securitization the transferee recieves the rights and obligations of the transferor. Technically it is said that securitization is a non recourse meaning that the risks could affect the holders of the securities.

Securitization of small businesses

Securitization of small businesses

In Europe, securitization has already been widely used, especially by banks in the form of non performing loans and public entities. In this period of crisis, European regulators consider a securitization solution to give new life to small business loans often denied by banks. For SMEs it would be a way to access the capital market through a form of financing with more favorable economic conditions. To do so would require the support of the ECB and European governments in order to avoid that securitization encourages the creation of undervalued stocks that are non transparent and therefore toxic to the financial system. The ECB is expected to create a new type of securitization characterized by low risk and extreme transparency.

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