Securitisation is a sophisticated financial mechanism that transforms non-tradable or illiquid assets into tradable securities by pooling them and selling shares in the pool to investors. This technique can be applied to various asset classes, including cryptocurrencies for exchange-traded funds (ETFs) and properties for real estate investment trusts (REITs).
Understanding Securitisation
From the perspectives of investors and regulators, securitisation involves the creation of a marketable instrument by combining financial assets, such as mortgage loans and debt. Investors who purchase these securities receive the principal and interest payments from the underlying assets, thereby assuming the role of lenders.
Securitisation is particularly beneficial for businesses with assets that generate regular and consistent cash flows. It provides a viable investment opportunity for entities looking to diversify and optimise their portfolios.
The Securitisation Process
The process begins when a business, known as the originator, selects specific assets to remove from its balance sheet. For example, a bank may choose to securitise mortgages and personal loans to free up capital for new lending opportunities. These selected assets form a reference portfolio, which the originator sells to an issuer. The issuer then converts the portfolio into tradable securities. Investors purchase these securities for a predetermined rate of return, effectively taking on the role of the lender.
This process enables the original lender or creditor to remove assets from its balance sheet, facilitating the underwriting of additional loans. Investors profit by earning a rate of return based on the principal and interest payments made by the debtors or borrowers on the underlying loans.
Types of Securitisation
There are various forms of securitisation, each with unique structures and characteristics. The most commonly utilised types include pass-through securitisation, pay-through debt instruments, and collateralised debt obligations (CDOs).
- Pass-Through Securities: These are pools of fixed-income securities backed by bundles of assets, such as mortgages. The holder receives both principal and interest payments.
- Debt Securities: Tradable debt instruments that signify a debt obligation from an issuer (government, organization, or company) to an investor who serves as the lender.
- Collateralized Debt Obligations (CDOs): Investment products comprising various bundled loans sold by the lender. The CDO holder can collect the borrowed amount from the original borrower at the end of the loan term. As a derivative security, the value of a CDO is based on the value of another asset.
Rationale for Bank Securitisation
Banks often securitize assets to remove them from their balance sheets, thereby freeing up capital for future loans and investments. This strategy enhances overall business operations and increases cash flow.
Selling a portfolio of loans outright can be challenging, as most investors lack the funds to purchase even a single mortgage, let alone a bundle. By securitizing a portfolio of mortgages, banks can sell fractional shares to individual investors, allowing them to collectively purchase the entire bundle. Investors are informed of the risk ratings associated with different loan groups within the bundle and receive interest payments based on the risk profile.
Polaris Financial Investments SA
Polaris Financial Investments SA exemplifies the application of securitisation in a specialised market. As a securitization company focusing on the healthcare sector, Polaris employs a secured investment process to offer eligible, qualified investors opportunities that deliver optimal risk-adjusted returns. Operating in a high-value, fast-growing private market, Polaris emphasises long-term viability and stability.
The company’s expertise enables Polaris to structure highly efficient financing solutions that address the specific challenges faced by healthcare businesses. Investors benefit from substantial returns and a high level of diversification with minimal correlation to financial markets and low sensitivity to interest rates. Concurrently, healthcare providers gain access to swift, flexible, and reliable financing solutions that meet their increasing liquidity needs.
Polaris maintains comprehensive control over the entire value chain through its operational entity in the USA. The company collaborates with top independent partners for auditing, risk management, accounting, due diligence, and all facets of the investment process.
Applications of Securitisation
Securitisation is employed across numerous industries. Prominent examples include auto loans, credit card receivables, healthcare invoices, and mortgages.
Unlike other investments, many loan-based securities are supported by collateral. Additionally, when the originator transfers debt into a securitised portfolio, it reduces the liability on its balance sheet, enabling the issuance of more loans.
In summary, securitisation offers a robust mechanism for converting illiquid assets into tradable securities, benefiting businesses, investors, and financial institutions by enhancing liquidity, diversifying risk, and facilitating new investment opportunities.