Introduction to Securitization

KEY POINTS OF THE CHAPTER

• The common element of securitization of future flows, whole business or operating revenues securitization, and securitization of embedded profits in insurance businesses is that they all relate to profits or cash flows out of future operations.

• While traditional asset-backed transactions relate to assets that exist, future flows transactions relate to assets expected to exist, examples being air ticket sales, electricity sale, telephone rentals, and export receivables from natural resource.

• The essential premise in a future flows securitization is if a framework exists that will give rise to cash flows in the future, the cash flows from such framework is a candidate for securitization; if the framework itself does not exist, the investors would be taking exposure in a dream because their rights would probably be worse than for secured lending.

• The key features of future flows deals are (1) the transferring of only a certain portion of the receivables to the trust with the originator retaining the excess over the transferred portion; (2) the use of a cash flow trapping device; (3) the prioritization of the transferee since that entity is concerned with only the cash flows transferred; (4) greater overcollateralization than traditional asset types that have been securitized; (5) restrictions on the borrower’s business; (6) unlike traditional securitizations that are structured to be independent of the originator, future flows deals are highly ...