The titrisation of credits

Appeared in the late 1960s in the United States, then introduced in France by the law of December 23, 1988, titrisation (or securitization in English) concerns most cases of transformation of credits. As an example of other procedures such as factoring, discount, assignment of Dapen and calculator of the financial newspaper illy, etc., titrisation also allows to find of fresh money, particularly for financing of operating needs.

Principle of titrisation

The titrisation is a financial technique that consists, for a company (transferor), in obtaining the financing by transferring to financial assets, such as credits, to an ad hoc company (issuer). And this in order to improve the exploitation cycle.

It should be noted that the securitization operation can be used by banks or credit institutions. In this case, its purpose is to reduce the amount of regulatory capital required to deal with the risks they have in their books. But, to obtain a financing resource from your credit incurs. And this in better conditions (attractive price, consistent maturity) ..

Operation of the titrisation of credits

The transferor sells the asset or the portfolio of assets to the issuer of obligations in order to transform them into negotiable and liquid securities

The issuer or the ad hoc company (said Special Purpose Company) buys the asset or the portfolio of assets, and issues obligations on the capital market

The investors, who are usually institutional, finally are those who buy the obligations

Once I receive the SPC, the subscription price is then returned to the transferor. In principle, any asset can be subject to titrisation from the moment it generates cash flows. Mortgage loans, various debts, a building that generates rents, etc.

The procedures that must be placed

In effect, titrisation needs preliminary preparations among which are:

·         The collection of data on titrisés assets

·         The placement of an elaborated legal document

·         And the magazine of the internal procedures of the initiating bank

The evolution of the titrisation operation

The classic titrisation operation

The classic titrisation is the first form of titrisation that has existed. Its objective is limited to obtaining a source of financing and improving the management of the balance. It is while the initiator begins to define a basket of homogeneous assets in order to make them eligible for titrisation.

The basket of assets (or credits) is then transferred to the securitization entity at the nominal value. Before the securities are issued, the titrisation entity proceeds to a veneer for that of which each slice has its own characteristics of risk and performance. In general, only 3 or 4 slices are issued:

·         Senior (approximately 80 to 90% of the debt issued)

·         junior

·         mezzanine

·         and equity (approximately 1 to 3% of the debt issued).

We can verify that the senior slice is more risky than the junior slice. And the payments due to the holders of the junior debt will be made only after all the payments of the senior debt have been made. Once all the versed payments, the equity slice will recover the balance.

However, in the case of non-honorable loans (not paid), the holders of the equity debt are the first to not receive remuneration. Then, the debt of the mezzanine. That is, the holders of senior debt are the best protected.

The synthetic titrisation operation

Since its creation, the titrisation evolved well. What gave rise to the synthetic titrisation. Its peculiarity is that it does not provide for the effective sale of credits to the titrisation entity. As there is no transfer of assets, but rather a transfer of risk thanks to what is called: a credit derivative.

Developed for ten years in the financial markets, a credit derivative is a financial instrument that seeks to transfer the credit risk of an asset from one counterparty to another counterparty through the circumvention of bilateral agreements. The counterparty to the derivative contract thus accepts to pay the losses suffered by the possessor of the assets, if a lack of payment is made on the latter.

Credit derivatives can cover several products such as:

·         Credit Default Swaps (CDS)

·         Collateralized Debt Obligations (CDOs)

Titrisation of credits: what interests?

For the transferor

·         Alternative solution to bank financing: the diversification of the sources of financing allows the group of investors that a company has to extend

·         Immediate transformation of illiquides portfolio into liquid securities. And this, thanks to the large number of investors present on the capital market

·         Improvement of the presentation of the balance sheet: this type of financing effectively reduces the needs to own funds and optimizes profitability

·         Transfer of risks: the risks of loss on the portfolio are passed on at the home of the investore

·         Reduction of interest costs, dissociating the note of the titrisés products of its own note

If the transferor is a bank or an insurance company, the titrisation mainly allows them to improve prudential ratios, among which are: liquidity, solvency, and having a better Active-passive management (ALM). In addition, the titrisation operations are done at the greatest discretion. What is preferable in front of clients (borrowers).

For the investor

·         Response to specific needs, and sometimes unique, investors

·         Eventual realization of capital gains at the time of transfer of securities

·         Diversification of portfolio in low-risk products

·         Possibility to invest (invest) in new classes of assets (stocks, classic bonds, treasury bond, real estate, etc.)

Other potential economic and social advantages

·         The titrisation allows to finance the credit for key sectors (particularly consumer credit) by giving them access to non-bank investors

·         The sale of assets titrisés on the market allows to create prices (prizes) publicly accessible

·         The secondary securitization market can reduce geographical and regional disparities in the availability and cost of credit at the scale of a given territory

As a souvenir, on the capital market, there are two types of markets: primary and secondary. It is on the primary market that all new active financiers are issued. The secondary market, as for him, designates the market on which the existing titles are changed.

The risks attached to the securitization of credits

On the one hand, given the number of auditors and the complexity of the operation, titrisation can generate fairly high assembly couts.

On the other hand, the risk transfer in the investor’s house is in danger of causing a financial loss if the generated flows are too weak or if the portfolio is of poor quality.