A securitization fund is an investment vehicle made up of assets that represent collection rights for the investor, such as loans or credits.
Collection rights, which can be of a different nature, from mortgages to loans for the purchase of automobiles, are grouped together and transformed into fixed income securities.
These, in turn, will make up the securitization fund, which is backed by such collection rights.
Characteristics of a securitization fund
The fund is known as a specialized securitization vehicle or SPV (special purpose vehicle). In Spain they are called the Securitization Fund Management Company and must be registered in the CNMV's Special Registry of Securitization Fund Management Companies.
It has a double objective: to buy assets to securitize and to issue securitization bonds for their subsequent placement on the market among investors.
The fund buys the loan portfolio from the transferor with money from the investors who buy the bonds. The assignor is the entity that originates the loans, a credit institution such as a bank or savings bank. Consequently, it will eliminate said rights from its balance sheet at the time they are transferred to the fund, discarding its risk. Hence, securitization bonds are known as “bankruptcy remote”. Now, your risk is with the investor.
In return, investors will receive payment in a series of periodic flows from the payments that individuals make on their loans. These flows are transferred to the investor in the form of partial amortizations. Therefore, they suffer the risk of early repayment, explained below, and their profitability will be subject to the risk assumed, qualified by a rating agency.
For example, if the securitized asset were a mortgage portfolio, the periodic flows would come from the amortization of said loans, through the amortization of the principal plus the payment of interest.
Its differential characteristic compared to other capital market securities is its secrecy in the event of the bankruptcy of the transferor, which is usually a bank or credit institution. That is, who originates the loans.
On the other hand, the structuring agent is the designer of the securitization structure and defines the number of fractions or tranches in which the securities to be issued will be distributed. Thus, it is common for several tranches to be created with different types of risk each. They depend on the risk and size of the loan portfolio, its repayment term and the position it would occupy in the priority of payments of the fund.
In general, securitization funds are based on a pass-through structure, in Spain. It means that investors will receive the flows generated by the loan portfolio. The consequence of this for the investor is their direct exposure to the performance of the securitized assets, assuming the risk of their future.
Finally, there are open and closed funds depending on the possibility of introducing new assets or liabilities to the securitization fund throughout its life. Closed funds are safer and shorter in duration, while open funds confer a higher level of risk.
Advantages of creating securitization funds
Among the main advantages of securitization funds are:
- For the bank or credit institution: Before being securitized, the credits that a bank maintains on the asset side of its balance sheet are illiquid, non-negotiable assets. Through its sale, the bank manages to refinance its loan portfolio, immediate liquidity, margin and free up its balance for the granting of more loans and growth. In addition, you also benefit from the diversification of financing means.
- For investors: They provide diversification through the possibility of investing in assets that they generally do not have direct access to.
- For society: Since they reduce the financing costs of companies and individuals and allow the risk to be distributed in a greater way.
Risks of securitization funds
There are several sources: risk
- Rating: The correct evaluation and rating by the rating agencies of the quality of the bonds issued.
- Changes in payments: The non-payment, delay, delay or early amortization in the payment of the underlying loan portfolio that supports the bonds issued, in which case the investor will not be able to go against the securitization company. Except for breach of any of the conditions of the prospectus or the deed of incorporation of the fund. The amortization risk, in particular, depends on the evolution of interest rates, increasing when rates rise.
- Low liquidity: They are illiquid instruments in secondary markets.
- Increase in systemic risk: In general, the systemic risk caused by the reinvestment of cash obtained by banking entities from the sale of the securitized assets also grows.