Cash & Liquidity Management
Published 8 MIN READ
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Securitisation: Transforming Your Balance Sheet

 

by Dave Sinclair and Direen Eraman, Debt Capital Markets team, Rand Merchant Bank

Securitisation is simply a form of secured financing; no dark arts, no magic. 

Securitisation is an efficient technique for raising capital and transferring risk from originators of financial assets to the capital markets. Financial assets, such as individual loans, are pooled, repackaged and sold off as notes to investors.  The process transforms a large pool of illiquid assets into tradeable, liquid securities allowing investors to purchase a small share of the larger asset pool. More importantly, it allows companies to free up their balance sheets by turning to the capital markets as a complementary source of funding, rather than relying solely on banks.  Following the collapse of the American sub-prime mortgage market in 2007 and the ensuing global financial crisis, securitisation fell out of favour globally. However it is far too useful to be banished for good and, over the past year there has been a significant international revival.  Fortunately lessons have been learned and unlike the complex and opaque structures pre-crisis, the securitisations of today are structured to be transparent, simple, easy to implement and used primarily for funding purposes. South Africa is no exception to the trend and securitisation represents a significant opportunity for companies looking for alternative sources of funding.

Over the past year there has been a significant international revival in securitisation.

The asset types that were historically pooled within a securitisation typically include residential and commercial mortgages, auto loans, credit card receivables and corporate loans.  But why stop there? Provided that the underlying assets are ‘high quality’, a securitisation structure can be used to unlock funding and liquidity for a company by pooling a variety of assets. High quality assets must be clearly identifiable, have defined terms of repayment, legally transferable, quantifiable revenue streams and a transparent history of how the underlying assets have performed. Entities are able to securitise a number of different assets or income streams such as mobile handset receivables, operating lease charges, rental streams, insurance premiums, medical aid contributions, municipal rates payments, customs revenue streams and airline ticket sales.  This allows a company to transform its balance sheet and create the funding and liquidity for much needed growth.