[i]By Daniel Kuri Breña R de T
Constantly, we face the term “securitization” in comments and financial news. It is common to read that those who carried out mortgage securitizations in the US were the ones to blame for the global financial crisis that began in 2008. But it is also common to hear that asset securitizations are an alternative source of financing, especially for companies with limited access to bank financing. But, concretely, what is a securitization?
Securitization is a process whereby a company’s future cashflows, derived from its sales of goods or services, are used to support a financing, generally through a trust that carries out securities issuances in the national or foreign markets.
The processes of securitization involve experts in several matters, financial advisors and brokerage firms, accountants, lawyers, fiduciaries, companies specialized in managing this type of operations, tax specialists and rating agencies.
SECURITIZATION OR MONETIZATION.
The terms “monetization” or “securitization” are used interchangeably to designate this type of financial structures. The term “monetization” – accepted by the Spanish Royal Academy, unlike “securitization” – has a more general meaning and refers to the action of giving “currency” for pecuniary purposes that aren’t. In other words, it is a matter of converting collection rights into securities or other instruments of rapid realization, that would otherwise belong just to the original owner and that wouldn’t be realizable in cash until its respective expirations.
The term “securitization”, more commonly used in industry, refers specifically to structures in which collection rights support the issuance of securities that are placed on stock markets. In short words, monetization or securitization involves the use of collection rights to allow the issuance of securities in the markets (securitization itself) or the contracting of loans or other types of financial transactions (monetization in the broadest sense).
The majority of the resources obtained by the contracting of credits or the issuance of securities – after making certain withholdings to constitute reserves – are delivered to the company that generates collecting rights in a way that allows it to receive the present value of its future cashflows. The cashflows received in the future, on the other hand, remain allocated to the payment of the contracted financing or of the securities issued. The amount of the issue and placement generally reflects the present value of the cashflows to be financed.
The securities to be issued in a securitization operation in the Mexican market generally consist of fiduciary certificates (CEBURES), which represent a collective loan by the issuing trust, while in foreign issuances, notes are generally placed (securities representing unconditional payment obligations, similar to promissory notes).
Securitizations that involve the issuance of securities in the markets require the preparation of prospectuses for the placement and registration of the securities in the National Securities Registry, with prior approval by the National Banking and Securities Commission (CNBV). Prospectuses are complex documents whose preparation is generally carried out by underwritters, lawyers and promoters, with the participation of various advisors. The CNBV has published general rules to be followed in the preparation of prospectuses.
These placements also require ratings of the securities to be issued, by rating agencies such as Standard & Poor’s, HR Ratings or Fitch Ratings. The rating agencies play an important role in the securitization process as they analyze the credit support of the operation, the adequacy of reserves, the robustness of the transaction documents, capacity of the managers and the risks of possible defaults.
Finally, it is important to note that usually these issuances are financed “without recourse”, meaning that they don’t have guarantee by the entities that generate the collection rights. The holders of the issued securities only have action against the issuing trust, and generally they can’t go against the companies that generated the collection rights, which are the ones that received the cash from the issuance.
[i] Daniel Kuri Breña is founding partner of Kuri Breña Sánchez Ugarte y Aznar, S.C. He has more than 20 years of experience in securitization transactions of all type of assets and in the design and implementation of structured financing operations. Daniel designed and implemented the first commercial collection rights securitization in the Mexican market.