Securitisation practice began in the 1970s and continues at present the enormous capital of outstanding securities. Securitisation is the financial intermediation by which illiquid financial contracts are transformed into diversified and liquid securities or in other words, securitisation is converting assets and risks to investors by generating funds for other new assets. Capital comes from the sale of various marketable securities. The examples of securitised assets by collateral type are: consumer loans, residential and commercial mortgages, credit cards, trade receivables, equipment leases, auto, collateral debt obligations, shipping/aircraft, consumer loans, student loans. One of the latest examples is the securitisation deal to raise £1.7 billion for UK government student loan.1 Offering companies opportunities as well as pitfalls remains one of the distinctive characteristics of these securities.
According to analysis from IMF economists, the securitisation helps to alleviate tight financial conditions and diversify risks thus supporting economic growth and financial stability by diversifying the funding base of economy.2 It connects financial markets and capital markets together and converts the assets into capital market commodities. This process is divided into different layers to the risk tolerance of various types of investors. Stakeholders reported that during banking sector crisis the securitisation could provide an alternative to bank finance to support the financial institution.3
The securitisation process is divided into different layers or tranches tailored to the investment risk tolerance of different types of investors. The process of securitisation creates the liquidity in the market place for the assets being securitised. As any other financial tool the securitisation has pros and cons.
Entities with limitations to find new sources of capital can use securitisation as an efficient access to new source of funding. In addition, it allows issuers to structure better credit rating, therefore it enables them to obtain funds at lower costs. The debt is issued with different credit risk, with several tranches. As a result, it can attract investors with different reward appetites. Securitisation allows organisations to meet Basel III requirements by removing assets from balance sheet and hence improving its rations following the capital release. During securitisation illiquid assets converts to cash. The financial risk from default on loans spread among investors and credit enhancers. It creates an optimal corporate restructuring by effective implementation of mergers and acquisitions processes. Securitised assets can be easily replaced by other types of assets.