Securitisation, Money Laundering and Fraud
| Date | 01 February 1997 |
| Published date | 01 February 1997 |
| Pages | 148-153 |
| DOI | https://doi.org/10.1108/eb027131 |
| Author | Andrew Haynes |
| Subject Matter | Accounting & finance |
Securitisation, Money Laundering and Fraud
Andrew Haynes
Journal of Money Laundering Control — Vol. 1 No. 2
INTRODUCTION
Securitisation1 is the process of raising finance by
the issuing of bonds or commercial paper. In many
cases the originator of the arrangement will, in
return, be selling a package of existing loan assets
in the form of debt instruments. The first of these
arrangements is known as 'primary securitisation',
the second as 'secondary securitisation'. There is
no generally accepted legal definition, though
Feency2 provides a useful one:
'...the process by which debt is made market-
able.
On a wider interpretation securitization
can be divided into two forms. In its most
extreme form it involves the unbundling and
repackaging of already existing loan portfolios
into securities. These securities are then sold,
thereby removing the asset from the originator's
balance sheet. The second form of securitization
involves the raising of debt through the issue of
securities in the capital markets to replace bank
loans.'
Thus in its most simple form the arrangement will
be structured as in Figure 1.
The special purpose vehicle is a company which
will be specifically established for the purpose of
buying receivables (if a secondary securitisation)
and issuing bonds which may be backed by those
receivables. In most instances it will be situated in
an off-shore jurisdiction.
The types of receivable which may be used are
extremely wide. Examples include:
— mortgages of land and property;
— credit card receivables;
— hire purchase receivables;
— health insurance;
— car leasing;
— aviation leasing;
— trade receivables.
There is no limit to what may be used provided
the market-place would regard it as suitable
finance against which the bond issue should be
made. However, commercial and industrial loans
are difficult to securitise.3
The issues which will tend to concern buyers of
the bonds will be:
— the quality of the loan assets concerned;
— the security which is available in association
with the assets;
— maturity periods;
— size and regularity of instalments;
— consumer credit early termination facilities4 (at
least where credit card receivables are con-
cerned);
— substitution rights.
The issue of debt itself by the special purpose
vehicle can take a number of forms of which the
commonest are:5
— public issue of debt instruments;
— private placement of debt instruments;
— commercial paper;
— medium term notes; and
— mezzanine or part equity issues.
The bonds issued will be assessed for credit risk by
major rating companies, mainly in the light of the
quality of the assets being transferred to the special
purpose vehicle.
It may not always be the case that a one-off
special purpose vehicle will be used. To reduce
overheads, multiseller securitisation conduits are
sometimes established to receive a number of
dif-
ferent originator's assets and make appropriate
bond issues. Such arrangements are often managed
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