What are the benefits of Securitization?

 There are multiple companies who are having involvement in sending money and making credit sales, these companies are having huge balance sheets containing huge receivable balance. Despite of having huge receivable balance sheets, these businesses can also face the liquidity crunch in order to run their business. In order to overcome this issues, a term was coined and it is Securitization.

Today in this guide, we are going to discuss on the benefits of securitization in business. But before understanding the multiple advantages of securitization, one should understand what securitization is?

What is securitization?

The securitization can be defined as the process for the creation of pool of assets from the illiquid financial assets including loans or receivables which are generally marketable.

Basically, securitization is the process of rebundling or repackaging of the illiquid assets into the marketable securities. These assets can be credit card receivables, automobile loans, residential mortgages or any other kind of future receivables.

 What are the features of securitization?

 Following we are listing some of the major features of securitization:

Financial instrument creations

The securitization process can be defined s the process for the creation of the additional financial products of securities in the market which are backed by collaterals.

Unbundling and bundling:

Combining of all assets in one pool is known as bundling while the breaking it into the instruments of fixed denomination is known as unbundling.

Tools for the management of risk

When the assets are securitized on the base of non recourse, then the process of the securitization act as the process for the management of risk as it helps in the shifting the default risks.

Structured finance

In securitization process, the financial structure is having a tailored structure helpful in meeting of the risk return trade of the profile of the investor and this is why the securitized instruments are known to be the perfect example for the structured finance.

Trenching

There is splitting of portfolio of different loans and receivables, or assets in several parts on the basis of risk and returns and each part is known as Trenche. Each of the Trenche carries different level of return and risks.

Homogeneity

Under every Trenche, the securities are of homogenous nature and they meant much for even the small investors who can afford to invest a little bit of the capital.

What are the benefits of securitization?

After understanding the definition and the major features of securitization, now comes the main point of this guide. Following are some of the major benefits associated with securitization:

From the angle of Originator

Originators are the entity that sells assets on collective basis to special purpose vehicle. Given below are some of the advantages of securitization for Originators:

OFF – Balance sheet Financing

In the case when the receivable or the loans are securitized, it helps in releasing the portion of capital which are tied up in the assets. This results in the off Balance sheet financing which is helpful in the improvement in the liquidity positions which is further helpful in the business expansion of the company.

Further specialization to the main business

After transferring the assets, the entity will be able more to concentrate on the main business point as the servicing of the loan will be transferred to SPV. And, in the case of non recourse arrangement, the burden of the default is even shifted.

Better financial ratios

In the case of banks or other Financial institutions, securitization is helpful in the effective management of the CAPITAL to Weighted assets ratio.

Reduction in the borrowing cost

As securitized papers are more rated because of the credit enhancement, they can be easily issued at the lower rates as of debts and hence is helpful for the originators to earn a spread which further leads to the reduction in the costs of the borrowing.

Cheaper Financing

With the help of securitization in order for the separation of the pool of the underlying loans or the receivables, the originator will get the option to get the financing at lower costs which is much lower from all the forms of borrowing. The reason behind the cheaper financing is that the receivables are having the power of providing the better credit quality in comparison to the originator itself.    

In the case when there is no securitization, the originator will be required to borrow for the finance which results in the additional debts.

Benefits for the balance sheets

With the help of the securitization, there will be acceleration in the cash receipts from the receivables along with the removal of the accounts receivables form the balance sheets of the originators. It is helpful in the reduction of the debt/ equity ratio of the originators and thus helpful for them in complying with the financial covenants in behalf of their on financials sheet borrowing. It will help them fpr more borrow as well as better returns on the capital.

From the Angle of the investors

Here are some benefits of the securitization for investors:

Diversification of the risk

Purchase of securities backed by different kind of assets is helpful in providing the tinge of diversification to the portfolio which is helpful in the reduction of the risks.

Regulatory requirements

Acquisition of the assets belonging to some particular industries like micro industry is helpful for the banks to meet their regulatory requirements of investments in the industry specific funds.

Protection against default

In the case of default by third party in recourse arrangement, the originator will get the chance to make good amount. And, this can be insurance arrangement for the compensation in the case of any suck kind of defaults.

  The bottom line

So these are some advantages of the Securitization!