Rationale
Large Corporate, Credit institutions, insurance companies and financing companies (Originator) may carry a range of assets in their balance sheet which comprises a fleet of real assets like cars, vans, boats, planes, … but also any other transportation means or machines.
In order to reduce the strain on their balance sheet and improve their Tier capital adequacy, these risk carriers use securitisation as an instrument to transfer and “sell” their risk to the market.
How?
By securitising the risk associated with these assets, these institutions transform them into a financial instrument which is then bought by investors.
A Special Purpose Vehicle (SPV) is setup in Luxembourg and buys the fleet of assets.
The SPV then obtains the rewards associated with the revenue streams attached to this fleet.
Types of Fleet :
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Cars, taxis, motorbikes, bicycles,
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Boats, ships, yacht,
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Planes, aircraft, carriers,
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Machines, electric panels, factories,
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Transportation means of any kind like trucks, lorries, vans,
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Billboards for advertisements,
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Any type of hard or movable assets which generate an income or need a financing
Types of Liabilities :
The most common liabilities are notes linked to value of the assets and the income they generate. By securitising a fleet, the Originator effectively sells it to third-parties. As opposed to traditional financing mechanisms such as traditional bond issuance or bank loans, securitisation removes the liability from the balance sheet of the Originator.
This can also be via a synthetic securitization by which the assets remain in the balance sheet of the Originator but the SPV will by contract (like a swap) take all the risks linked with the fleet or linked to the income derived by the fleet.
The SPV can issue several types of securities to finance the securitisation transaction:
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Units : shares of the SPV
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Notes, Bonds issued by the SPV which yield a fixed interest rate generated by the income derived from the rental of the fleet for instance
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Certificate : asset backed securities which value and yield are variable and linked with the value of the fleet and the income it produces
These securities can be either sold to investors like institutional investors, investment funds, hedge fund, pension schemes, Qualified Investors, High Net Worth Individuals or Family Office. These represent an attractive opportunity for higher yields in a low-interest environment.
In essence all future payments or cash flows which are financed can be packaged into a securitisation vehicle.
Functioning
The Fleet is usually grouped by nature in order to re-package them into a securitisation vehicle. Once the portfolio has been defined, the offering memorandum is drafted to define the underlying assets, the risks associated with future payment of the income and the remuneration of the investors. The most common structure is the issuance of bonds by the securitisation vehicle, with a fixed or variable coupon.
Like for a normal bond issue, the securitisation vehicle can be submitted to a rating agency to obtain a credit rating and help clients evaluate the risks associated with their investment. Contrary to a bond, which carries the risks associated with the issuers’ capacity of payment of interest and principal, the securitisation issue carries two types of risk:
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The risk of non-payment of the income streams and principal by a range of often unknown debtors (car owners, credit risk on the corporate who use the fleet, etc).
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The risk on the value of the fleet itself which usually serves as collateral to the bond holders, e.g. the value of the fleet at maturity.
The range of applications is wide. The securitisation techniques remain a powerful, flexible and cost-effective alternative to traditional bond issuance and many other forms of financing.
For information on securitisation in general, please request our brochure: Securitisation in Luxembourg
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