Securitization

A securitization pools income-producing assets such as receivables, loans, and leases, and funds them by issuing notes backed by that pool, usually through a bankruptcy-remote special-purpose vehicle. The originator sells the assets to the vehicle, the vehicle issues rated notes to investors, and the cash the assets generate is paid out through a contractual waterfall. The investor is exposed to the performance of the pool rather than to the originator's balance sheet.

It can make sense when a business wants to convert a portfolio of receivables or loans into capital, match-fund assets against liabilities, or reach investors who buy rated paper rather than whole loans, often at a lower cost than unsecured borrowing. Whether it fits depends on asset quality, the size and granularity of the pool, the strength of the true-sale analysis, and the all-in cost of the structure against simpler financing. We assess that before recommending the route.

It is the judgment a bankruptcy court would make about whether the seller kept the risks and rewards of the receivables. Recourse to the seller beyond breaches of its representations, a right to whatever is left after the notes are paid, or an obligation to repurchase loans that default each point toward a loan. Recourse limited to eligibility breaches, a fixed price paid at closing, and the buyer's control of the collections point toward a sale. The opinion a rating agency receives is reasoned rather than clean: it states the facts assumed, drawn from an officer's certificate, and concludes that a court should reach the sale result on them. It matters because if the court reaches the other result the receivables are property of the seller's estate, the automatic stay stops collections from reaching noteholders, and the notes are simply secured debt of a bankrupt company.

Rating agencies test both the assets and the law. They model the cash flows of the pool against their criteria, and they rely on legal opinions covering true sale, non-consolidation, and enforceability of the security. We prepare the structure to meet those criteria, deliver the opinions the agencies require, and work through the questions raised in committee so the notes can carry the rating the deal needs to be sold.

Hart David Carson LLP acts across the table, for originators selling the assets, arrangers structuring and placing the notes, investors buying the paper, and trustees and agents administering the deal after closing. Each role sees the same structure from a different angle, and our work follows whichever seat the client is in, from the true-sale foundation through the security, the waterfall, and post-closing enforcement.

A registered deal is reviewed: the registration statement on Form SF-1 or SF-3 goes through the SEC's Office of Structured Finance, and the preliminary prospectus with its asset-level data must be on file three business days before the first sale. A Rule 144A deal is not reviewed before it closes, but it is not outside the SEC's reach. The sponsor files Form ABS-15G reporting repurchase demands, the information given to the hired rating agency is governed by Rule 17g-5, and the risk-retention rule applies to registered and unregistered deals alike. Anti-fraud liability under Rule 10b-5 attaches to the offering memorandum as it would to a prospectus. We have represented clients in matters before the SEC. Where the issuer sits offshore, its own regulator and listing rules are layered on top, and we coordinate locally admitted counsel there.