Securitization as a Source of Corporate Financing: A Look at an Expanding Tool
For decades, securitization has been a vitally important financial tool in the business world. While its popularity has grown globally, its essence remains the same: to turn illiquid financial assets into marketable securities. Let’s take a look at this process and why it has become such an attractive source of financing for companies.
What is securitization?
Securitization is a financial process that allows an entity, usually a company, to turn future cash flows into present and liquid financial instruments by issuing securities. These assets, usually accounts receivable or loans, are grouped into a fund, which then issues securities backed by these assets.
Benefits of securitization for companies
a) Immediate liquidity: Companies can turn illiquid assets, such as loans or accounts receivable, into cash, improving their cash flow. b) Diversification of financing sources: Allows companies to access financing without relying solely on bank loans. c) Optimization of the balance sheet: As assets are transferred to a special purpose vehicle, they are removed from the company’s balance sheet, potentially improving financial ratios. d) Cost reduction: In some cases, securitization may offer more competitive financing rates than other traditional sources.
Relevant market data
Since the financial crisis of 2008, regulation around securitization has tightened, seeking greater transparency and risk reduction. However, according to data from the Bank for International Settlements, the global securitization market has maintained steady growth, surpassing $10 trillion in 2020. In regions like Europe, securitization has been promoted as a mechanism to improve the flow of financing to the real economy. The European Union, through regulations like the STS (Simple, Transparent and Standardized), has sought to create a more transparent and efficient framework for this financial tool.
Risks and considerations
Like all financial tools, securitization is not without risks. One of the most significant is liquidity risk, especially if the market contracts and there are no buyers for these securities.
Securitization has proven to be a valuable financial tool for companies looking to diversify their financing sources and improve their liquidity. While it does pose certain risks, a robust regulatory framework and proper management can maximize its benefits and minimize its challenges. In a rapidly changing business world, the ability to adapt and leverage new forms of financing will be key to long-term success.
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