Companies regularly use bank loans and the issue of bonds to secure their liquidity needs. Such financing increases the burden of their liabilities and negatively affects the balance sheet structure, capitalisation ratio and general risk profile of the company. Another way to increase liquidity may be the securitisation of otherwise illiquid or less liquid assets. Such assets can take a variety of forms, e.g. mortgages, unpaid debtors or loans or any other type of asset that cannot immediately be turned into liquidity. Such assets often also have an increased risk on the balance sheet related to their valuation. In particular companies like credit institutions or financing companies are facing such issues on a daily basis.
Compared to a traditional loan raised or bond issued by a company in order to get liquidity, the securitisation is a more flexible and cost efficient solution. Contrary to a third party financing by way of bonds or loans, the notes issued by an independent Securitisation cell are not affecting the originating company in respect to its capacity to repay the principal and interests. A company will in fact sell the illiquid asset to the Securitisation entity, typically against cash.
Securitising the receivables means converting illiquid assets into liquidity, which in turn is reflected in improved cash flow, equity value and reduced risks such as write-offs on loans that have not been repaid or outstanding interest.
The claims towards third parties will be defined and grouped into one portfolio. Coprolin will then create the dedicated cell and drafts the Term Sheet (Offering Document) setting out the terms of the notes, and will also undertake a detailed risk evaluation for investors.
The notes eventually will be dematerialised and sold to qualified investors, possibly through placement agents. With the proceeds from the sale of the notes, the cell is going to acquire the loan portfolio from the originator and becomes therefore the legal owner of the loan portfolio (true sale).
A practical example
A credit institution lends small sized loans with interests to individual persons, who need a uncomplicated, quick loan e.g. for acquisition of furniture or payment of other liabilities or any other private reason. The income of the company is hence generated from the interest paid by its borrowers. Most of the borrowers pay back the loan and interest regularly over a defined period of months, simply for being grateful of having received the small loan without complications when it comes to guarantees or sureties. But there are unfortunately also borrowers who do not comply with the agreed terms of repayment. The credit institution can opt to securitise a mixed portfolio of good and defaulting claims or purely securitise distressed claims, obviously for a fraction of their book value. The credit institution can be a servicer of the cell in charge of debt collection.
Whilst the borrower still owes the loan and accrued interest, it is no longer the credit institution who is the creditor, but the cell. And when borrowers eventually repay the loan with interest to the cell, the cell’s NAV increases, which is for the benefit of its noteholders.