The Process of Securitization

We look now at the process of securitization, the nature of the SPV structure and issues such as credit enhancements, and the cash flow waterfall. 

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The SPV s receivables, for example, cannot be claimed by unsecured creditors of the originator except through the originator s equity interest in the SPV, See supra note 52. However, as previously discussed in Part I, to the extent that the receivables sold in a securitization mightbe adversely affected by the originator s bankruptcy, such as is the case with franchise fees, the process of securitization is made more difficult. See Schwarcz, supra note 6, at 7-9, Ills. 

By holding the assets within an SPV framework, defined in formal legal terms, the financial status and credit rating of the originator becomes almost irrelevant to the bondholders. The process of securitization often involves credit enhancements, in which a third-party guarantee of credit quality is obtained, so that notes issued under the... 

FIGURE 15.1 illustrates the process of securitization in simple fashion. 

The process of structuring a securitization deal ensures that the liability side of the SPV—the issued notes—carries lower cost than the asset side of the SPV. This enables the originator to secure lower cost funding that it would not otherwise be able to obtain in the unsecured market. This is a tremendous benefit for institutions with lower credit ratings... 

Securitization involves a true sale of the underlying assets from the balance sheet of the originator. This is why a separate legal entity, the SPV, is created to act as the issuer of the notes. The assets being securitized are sold onto the balance sheet of the SPV. The process involves ... 

Credit enhancement refers to the group of measures that can be instituted as part of the securitization process for ABS and MBS issues so that the credit rating of the issued notes meets investor requirements. The lower the quality of the assets being securitized, the greater the need for credit enhancement. This is usually by one of the following methods ... 

Fuller, R. 2000. The task-capabUity interface model of the driving process. Recherche Transports Securite, 66, 47-57. 

All securitization structures incorporate a cash waterfall process, whereby all the cash that is generated by the asset pool is paid in order of payment priority. Only when senior obligations have been met can more junior obligations be paid. An independent third-party agent is usually employed to run tests on the vehicle to confirm that there is sufficient cash available to pay all obligations. If a test is failed, then the vehicle will start to pay off the notes, starting from the senior notes. The waterfall process is illustrated in FIGURE 15.2. 

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