Securitization

Securitization is the process that best identifies the phenomenon of financial innovation process that has hit the world market in recent decades:
Launched in the United States during the 1970s and initially employed with the aim of demobilizing mortgage loans in the portfolios of financial institutions, it represented an operation that arose primarily with the simple objective of satisfying a need for liquidity. Today this technique has evolved significantly, both from the point of view of the asset classes that have been securitised and from the point of view of the parties that have used it.

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The assets acquired by the SPV represent the guarantee of payment of what has been contractually agreed to the holders of the issued securities. For this reason, securities are referred to as asset-backed securities, i.e. “asset-backed financial instruments”. It ‘important to note that payments to holders of ABS depends solely from the cash flows produced by these assets sold: this is why we talk about cash flow ABS.

The success of a real estate securitization depends essentially on the ability of the properties sold to generate cash flow adequate to service the securities issued. The identification of assets is therefore one of the critical activities for the success of a securitisation.

It is therefore necessary to highlight what are the essential characteristics for a group of assets (real estate) to be used as an underlying in the issuance of ABS.

Mainly, assets must have the following specific requirements:

– be easily identifiable;

– be legally separable from the originator’s assets;

– generate good cash flow;

– be of consistent amount.

Real estate is easily identifiable, legally separable from the originator’s assets, can generate cash flows (through leases), must have a positive capital appreciation and have a significant value: it is therefore possible to structure a securitisation transaction.

Securitization of real estate can, therefore, be a good solution for the originator, especially in times of economic stress, to obtain liquidity and/or reduce the weight of fixed assets. The securitisation option is an alternative to sale or spin-off transactions.

One of the specific requirements mentioned above says that the assets must ‘be consistent in amount’. The screening activities of CLS Europe Invest Ltd. have shown that certain assets, due to their small size, are a priori excluded from securitisation activities, with serious disequilibrium in balance sheets and low participation opportunities for small and medium-sized companies.

As a result of the above considerations, CLS Europe Invest Ltd, has structured a project called “ASSETS SECURITIZATION PROJECT” in order to give the opportunities to small and medium-sized entrepreneurs with financial difficulties such as:

(a) to demobilise any non-performing loan or lease payments undertaken on its real estate assets

(b) to obtain funds to be reinvested in new investments or to be used to cover temporary liquidity shortages.