Securitisation is a financial mechanism that is often perceived as complex and sometimes associated with past economic turbulence. Yet it is a powerful and structuring financing tool for banks and large corporates alike. Understanding its fundamental principles enables us to grasp how assets, such as receivables, can be transformed to access new sources of liquidity. This article provides an overview of securitisation, covering its mechanisms, players and legal framework - aspects that we cover in greater depth in our dedicated publications. Structuring these complex transactions requires a expertise in banking and financial law to ensure safety and compliance.
What is securitisation and how does it work?
Securitisation is a financial technique that involves transforming illiquid assets, such as a portfolio of mortgages or trade receivables, into financial securities that can be traded on the markets. The aim is to enable the initial holder of these assets to refinance immediately without waiting for their natural maturity.
The arrangement is based on three inseparable pillars. Firstly, a transfer of assets: the company or bank (the transferor) sells a set of receivables that it holds. Secondly, the creation of a dedicated structure called a securitisation vehicle (SPV), Special Purpose Vehicle or SPV). This entity, which is legally separate from the seller, purchases the receivables. Third, issuing securities: to finance the purchase of the receivables, the securitisation vehicle issues securities (units, shares or bonds) that are subscribed to by investors. The financial flows generated by the transferred assets (for example, monthly loan repayments) are then used to remunerate these investors.
The key players in a securitisation transaction
The success of a securitisation transaction depends on the coordination of a number of players, whose roles are well defined. Each player plays a specific role in the transaction's value chain.
The originator, also known as the originator or transferor, is the entity behind the transaction. This is the bank or company that wishes to mobilise its assets by selling them to the securitisation vehicle.
The securitisation vehicle (SPV) is the central pivot of the arrangement. This ad hoc structure, created specifically for the transaction, purchases the assets and issues the financial securities. Its legal isolation from the originator is essential to protect investors from the risk of the originator going bankrupt.
Investors are the buyers of the securities issued by the TO. They are usually institutional investors such as banks, insurance companies or investment funds seeking to diversify their investments.
Other professionals are also involved, such as the arranger, usually an investment bank that structures the deal, and the lawyers who secure the legal arrangements. For a better understanding of the responsibilities and interactions of each party, see our article on the role of the various players in securitisation.
What are the objectives and advantages of securitisation?
For banks, securitisation fulfils several strategic objectives. It enables them to transform long-term loans into immediate liquidity, thereby improving their cash flow. It is also an effective balance sheet management tool that can reduce their regulatory capital requirements by removing loans from their balance sheet. Finally, it transfers the risk of default from borrowers to investors, a mechanism where recovery of securitised receivables is an essential component.
For companies, particularly large industrial or commercial groups, securitising their trade receivables is an attractive alternative to traditional bank financing or factoring. It gives them access to capital markets and often enables them to obtain financing at a more competitive cost, while optimising the management of their trade receivables and cash flow.
The French legal framework for securitisation vehicles
French law was slow to adopt securitisation. The first legal framework, introduced by the law of 23 December 1988, created the fonds communs de créances (FCC). Since then, the legislation has constantly evolved towards greater flexibility and modernisation to bring it into line with international practices and make the Paris financial centre more attractive.
French law currently offers a dual structure for securitisation vehicles. Transactions can be housed either in a fonds commun de titrisation (FCT), which is an unincorporated co-ownership, or in a société de titrisation (ST), which takes the form of a société anonyme (SA) or a société par actions simplifiée (SAS). This choice offers considerable flexibility in adapting the legal vehicle to the specific features of each transaction. For a detailed analysis of these two forms and their rules, see our article on the legal framework for securitisation undertakings in France.
The influence of European law on securitisation
The 2008 financial crisis had a profound impact on the securitisation sector and led European regulators to intervene. The aim was to make the market safer and more resilient, by avoiding the excesses of the past. The European Regulation of 2017 established a harmonised framework for all securitisations in the European Union.
The major innovation of this regulation is the creation of the "STS" (Simple, Transparent and Standardised) label. A securitisation that meets a set of strict criteria can obtain this quality label, which gives it more favourable regulatory treatment and aims to restore investor confidence. This European STS regulation is now a key reference for players in the market.
Transparency and risk retention requirements
To strengthen market discipline, European regulations impose two fundamental obligations. First, enhanced transparency requirements oblige originators to provide investors with detailed, standardised information on the underlying assets and the structure of the transaction. Secondly, the risk retention obligation requires the originator to retain an economic interest of at least 5 % in the transaction. This rule ensures an alignment of interests between the originator and investors, encouraging better selection of securitised assets.
The success of a securitisation transaction, whether national or European, depends on impeccable legal structuring and a detailed knowledge of the applicable regulations. To secure your arrangements and benefit from tailored advice, our law firm puts its expertise at your service.
Frequently asked questions
What is securitisation in simple terms?
Securitisation is an operation that enables receivables (such as loans or invoices) to be grouped together and used as a medium to issue and sell new financial securities to investors. It is a way of transforming future debts into immediately available cash.
Who uses securitisation and why?
Banks use it to obtain liquidity, improve their prudential ratios and transfer risk. Large companies use it to diversify their sources of financing, often at an advantageous cost, by mobilising their trade receivables.
What does the STS label mean for a securitisation?
The STS label stands for "Simple, Transparent and Standardised". It is a European certification that guarantees that a securitisation transaction complies with quality and low-complexity criteria, with the aim of making it safer and easier for investors to analyse.
Is securitisation a risky business?
Like any financial product, securitisation involves risks, mainly linked to the quality of the underlying assets. However, European regulations (notably the STS label and the risk retention obligation) have been put in place to better manage these risks and protect investors.
What is the difference between an FCT and a securitisation company?
The Fonds Commun de Titrisation (FCT) is an unincorporated co-ownership entity managed by a management company. The Société de Titrisation (ST) is a real company (SA or SAS) with legal personality, offering a more traditional legal structure that is sometimes better understood by international investors.
Why is the role of a lawyer important in a securitisation?
The lawyer plays a central role in structuring the transaction in compliance with a complex and constantly evolving legal framework. He drafts the legal documentation, ensures that the transfer of assets is valid and secures the entire package to protect the interests of his client and the other parties involved.
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