1. SECURITISATION– THE FINANCIAL INSTRUMENT OF THE NEW MILLENINIUM
Samathri Kariyawasam, B.B.A. (Colombo)
Attorney - at Law
Senior Legal Officer – DFCC Bank
What is Asset Securitisation?
Asset-backed securities are securities, which are based on pools of underlying assets.
These assets are usually illiquid and private in nature. A securitisation occurs to make
these assets available for investment to a much broader range of investors. The “pooling”
of assets makes the securitisation large enough to be economical and to diversify the
qualities of the underlying assets. A special purpose vehicle is set up which takes title to
the assets and the cash flows are “passed through” to the investors in the form of an asset-
backed security. The types of assets that can be “securities” range from residential
mortgages to trade receivables. The asset-backed security usually qualifies for a top rating
and enables the issuing company or bank to raise funds at a very attractive rate.
2. DEFINITION OF SECURITISATION
“A device of structured financing where an entity seeks to Pool together its interest
in identifiable cash flows over time, transfer the same to investors either with or
without the support of further collaterals and thereby achieve the purpose of
Securitisation, the Financial Instrument of the New Millennium
In simple Securitisation is a process of converting something, which is not a security in to a
In a Asset Securitisation, a Financial claims or a claim against a third party are assigned or
sold to a special entity called the Special Purpose Vehicle (SPV). The objective is to legally
separate asset from the issuer. The SVP in turn issues one or more debt instruments,
whose interest and principal payments are serviced from the cash flows arising out of the
Pool of Asset Backed
Cash flows Securities
The security at the end of the process of securitisation is an Asset Back Security and this
security is significantly different from a usual Capital Market instrument. A usual Capital
Market instrument is an exposure in the Business of the issuer but an Asset Back security
is simply an exposure in an Asset.
2. 3. PARTIES INVOLVED IN SECURITISATION
The Debtor who has sums to pay to the Organization
The Entity that initiates the process of securitisation by transforming its assets in to
c) Special Purpose Vehicle (SPV)
A legal entity either created or existing which act as a transformation device holding the
assets receivable transferred by the originator on behalf of the investor and issues
If an operating company holds assets, it might incur expenses, and or incur liabilities
and might go bankrupt, but a special purpose vehicle is a legal entity with only the
specific assets transferred by the Originator. This is what makes a special purpose
vehicle Bankruptcy remote
ORGANIZATIONAL FORMS OF SPVS
1. Signal Purpose Company
2. Government agencies
3. Insurance Companies
4. BANKRUPTCY REMOTE SECURITISATION
The main goal of a company utilizing asset securitisation techniques is simple: to obtain
access to low-cost capital that is otherwise unavailable through conventional means. The
company desiring to effectuate a securitization must begin by identifying assets that
generate a relatively predictable stream of payments. These assets are quot;receivables.quot; The
company seeking to securitise the receivables is known as the quot;originator.quot;
One of the primary goals of securitisation is to isolate the receivables from the group of
assets held by the originator in the event of the originator's bankruptcy. In order to
adequately shield the receivables from the originator's bankruptcy estate and from the
reach of the originator generally, it is necessary to set up what is known as a special
purpose vehicle (quot;SPVquot;). The SPV will purchase the receivables from the originator and
issue securities backed by the receivables. It is important that the SPV purchase the assets
in what bankruptcy law refers to as a quot;true sale.quot; That means that the assets will not
become a part of the originator's bankruptcy estate should the originator become the
subject of a bankruptcy proceeding.
Another way to shield the SPV from the originator is through the observance of all
necessary formalities consistent with existing as a completely separate entity. This should
prevent the bankruptcy court from substantively consolidating the assets and liabilities of
the originator with that of the SPV. It is important to keep the SPV and its receivables out of
the originator's bankruptcy estate,.
Finally, the structure of the SPV should prevent it from engaging in any activities outside of
its quot;special purpose.quot; The SPV's only purpose should be to hold the assets that provide the
basis for its securities.
All of the procedures outlined above allow the SPV to achieve the status of quot;bankruptcy
remotequot;-a rating company's indication of a reduced risk that the SPV will be strapped into a
bankruptcy of the originator. The SPV's ability to attain the status of bankruptcy remote is a
cornerstone of any securitisation as it allows the SPV to issue debt securities at a lower
rate of interest than the originator.
Asset Securitisation: How Remote is Bankruptcy Remote? by Michele J.Cohn
3. 5. STRUCTURE OF SECURITISATION
When discussing the structure of securitisation it can be mainly categorised into Existing
Asset Securitisation and Future Asset Securitisation.
In an Existing Asset securitisation, the cash flow or the Asset exists. In a Future flow
securitisation there is no existing claim, the claim with be created in future. An Exiting Asset
Securitisation is a distinction between Mortgage backed securities and Asset back
securities. The mortgaged backed securitisation is the securitisation of mortgage loans
including commercial as well as residential loan mortgages. The Asset backed
securitisation is securitisation of non – mortgage assets
6. SOME BASIC ATTRIBUTES OF ASSETS THAT CAN BE SECURITISED
Assets should represent a cash flow
Cash flow should be for a period of time
Cash flow should be steady and easy to identify
Quality of the receivables
• Good record of past payment statistics
• Good collateral protection
Capacity to assign
Securitisation is a transfer of a right to receive against a third party of the assignee.
Homogeneity of Assets
Assets in one portfolio should be of similar features
7. BASIC PROCEES OF SECURITISATION
4. 8. LEGAL FRAMEWORK FOR SECURITISATION
It is important to ensure that the transfer of assets by the originator is a Legally Valid
Transfer and such assets would stay clear of any claim of the originator his creditor,
liquidator and serve for the benefit of the investor.
9. BASIC PRE-CONDITION FOR LEGAL TRANSFER OF RECEIVABLES
The receivables must be existing at the time of the assignment.
The Receivables must be identifiable:
• Who is the obligator, whose debt is being transferred
• If the Obligor has several obligations to pay, which of these obligations are being
The whole of the Receivable should be assigned
• “If there is a assignment of a receivable, then the whole of the receivable should be
assigned”. English Common Law Principles
It must be an assignment of a right and not a obligation
• Assignment of a right is possible
• Assignment of a Obligation is possible, only if the Person to whom the Obligation is
owed given his consent to the Assignment.
This principle is not applicable to securitisation as in securitisation there is no
transfer of Obligation, but only a transfer of a right.
• If there is a right with the Originator, which is based on an Obligation of the
Originator the right is not assigned unless the obligation has been satisfied
10. LEGAL ISSUES IN SRI LANKA LEASE SECURITISATION MARKET
According to Sec 24 of the Finance Leasing Act No. 56 of 2000 “Lessor may with written
notice to the Lessee, transfer or assign all or any of the Lessor’s rights to any other
Registered Establishment “.
This was a stumbling block to the development of the Lease securitisation in Sri Lanka as
Lessor notification was a cumbersome process and did not obviously serve the business
interest of the Lessor or the Originator.
Further this Act prevented any institution which deals in Leasing to be a registered Leasing
entity with the Central bank of Sri Lanka if it is to carry out Securitisation on Finance Lease
At present the market place is crowded with many Financial Institutions which are dominant
players in the Leasing market and the existence of the above constraints restricted the
growth of the Leasing Securitisation market. Several amendments were introduced by the
Act No. 24 of 2005 which allowed Leasing receivables to be assigned to the Special
Purpose Vehicle (SPV) or the Trust amounting to a ‘True Sale”.
It is also important to note that as per the said amended Act No 24 of 2005 (Sec 24),
upon transfer of the right in a motor Vehicle within the meaning of the Motor Traffic Act to a
SVP, the transferee (in securitisation the SVP) shall be deemed to be the absolute owner of
the Motor Vehicle.
Securitisation-The Financial Instrument of the New Millennium is expected to capture the
capital Market of the World.
In Sri Lanka Securitisation has become a popular Financial Instrument but there are
number of Legal, Taxation and Administrative impediments that presently hinder the
potential growth in Securitisation market. Therefore for there to be Ideal Securitisation, the
Legal system must provide for the establishment of securitisation vehicles with the
necessary independent status and the powers to carry out their necessary operations.
1. Vinod Kothari, Securitisation, The Financial Instrument of the New Millennium (2nd edition)
2. Asset Securitisation: How Remote is bankruptcy Remote? by Michele J.Cohn