Securitisation is a sophisticated financial engineering operation that transforms illiquid assets into marketable securities. To better understanding securitisation in its entiretyIn the case of a securitisation vehicle, it is essential to look at the structure of the vehicle itself: the securitisation vehicle (SPV). Its effectiveness is based on a principle that is simple in appearance, but complex in execution: the creation of a special purpose vehicle, perfectly separate from that of the company selling the assets. But what do you actually find on either side of your balance sheet? An analysis of the securitisation vehicle's assets and liabilities reveals precise legal mechanisms designed to secure the transaction for both the seller and the investors. Putting together this legally regulated balance sheet requires a detailed knowledge that only solent avocats' expertise in banking and finance law can guarantee.
Asset composition of securitisation vehicles
The assets of a securitisation vehicle constitute the exclusive collateral of its investors and creditors. It is made up of the risks to which the entity is exposed, financed by the securities issued as liabilities. The nature and management of these assets are strictly controlled to ensure the stability and predictability of financial flows. It is possible to refer to the legal framework for securitisation undertakings in france to better understand the forms that these vehicles can take.
Nature and type of eligible receivables
The core asset of a securitisation vehicle is generally a portfolio of receivables. French law has gradually extended the range of receivables that can be securitised, offering companies great flexibility. The main ones are
- Bank receivables This is the historical category, including home loans, consumer credit and leasing receivables.
- Trade receivables Transfer of trade receivables: a company can transfer its trade receivables to a transfer agent to obtain immediate cash and optimise the management of its trade receivables.
- Future receivables Assignment of receivables: legislation authorises the assignment of receivables that have not yet arisen, provided that they are sufficiently identifiable. This possibility is essential for recurring securitisation programmes, known as "revolving" programmes, which provide long-term financing. The legal framework secures these transfers, even in the event of insolvency proceedings against the seller.
- Doubtful or disputed debts Securitisation: it is also possible to securitise portfolios of receivables for which collection is uncertain. Such an operation cleans up a company's balance sheet, but exposes investors to greater risk. However, under certain conditions, the debtor of a receivable deemed to be disputed retains the option of exercising a "disputed withdrawal" by reimbursing the organisation for the actual sale price of the receivable.
- Debt securities Debt securities: a TO may also acquire existing debt securities, such as bonds or negotiable debt securities (TCN), including by subscribing for them directly when they are issued.
Liquidity and asset preservation
In addition to receivables, the securitisation vehicle's assets include cash. These are the sums received from the collection of receivables, awaiting distribution to investors. The law strictly regulates the use of this cash. It may only be invested in investments deemed to be safe and liquid, such as deposits with credit institutions, treasury bills or certain high-grade negotiable debt securities.
Safeguarding assets is an essential task entrusted to the organisation's custodian. It is this institution that is the legal custodian of the assets, in particular the assignment slips that formalise the transfer of ownership of the receivables. For practical reasons, the physical custody of original contracts is often delegated to the entity responsible for collection (usually the assignor). However, this delegation is carried out under the responsibility of the custodian, who must ensure that adequate safekeeping and control procedures are in place.
Guarantees attached to assets
When a securitisation undertaking acquires a receivable, it simultaneously acquires all the securities, guarantees and accessories attached to it. This transfer takes place ipso jure, without the need for additional formalities. This is a fundamental point that makes the transaction more secure. For example, if a debt is secured by a mortgage, the transfer of this mortgage to the OT is automatic and effective against third parties as soon as the transfer form is handed over, dispensing with any land registration formalities. This legal simplification is a major strength of the French securitisation framework, as it reduces costs and delays while providing robust protection for investors.
Acquisition and sale of securitised receivables
The transfer of receivables from the seller to the securitisation vehicle is the key moment in the transaction. To be effective and indisputable, particularly in the event of the assignor's bankruptcy, this transfer must follow a specific legal procedure that departs from the ordinary law on the assignment of receivables, which is considered too cumbersome and unsuitable.
The transfer form mechanism and its effects
To simplify the transfer of thousands of receivables, French law has introduced a mechanism inspired by the Dailly Act: assignment by simple delivery of a slip. This document, known as a "deed of assignment of receivables", lists the receivables assigned or provides the information needed to identify them. If the assignor simply hands it over to the securitisation vehicle (represented by its management company), ownership is transferred.
The effects of this transfer are immediate and powerful. As between the parties, the assignment is perfected from that moment. Above all, it becomes enforceable against third parties - including the debtor, the assignor's other creditors and the court-appointed administrator in the event of collective proceedings - on the date stamped on the slip. This erga omnes enforceability, obtained without costly formalities such as service by a bailiff, is the cornerstone of the legal certainty of securitisation.
Transfer of security interests and perfection against third parties
One of the most significant advantages of the assignment by docket mechanism is the automatic transfer of guarantees attached to receivables. Whether it is a guarantee, a mortgage or any other security, it is transferred automatically with the principal claim. As mentioned above, the law specifies that no further formalities are required for this transfer and for it to be effective against third parties. This provision is essential for claims secured by mortgages, as it dispenses with the need to register amendments with the Land Registry, a procedure that is usually long and costly. The securitisation body thus immediately benefits from the same protection as the original creditor.
Commingling risk management and earmarked accounts
When debt collection is handled by the assignor, a specific risk arises: the "commingling risk". This arises if the sums collected on behalf of the TO are mixed with the transferor's own cash. If the transferor goes bankrupt, the funds belonging to the TO could be seized by its creditors. Managing this risk is a central element in the recovery of securitised receivables.
To counter this danger, French law has established a highly effective tool: the special purpose account. This is a bank account opened in the name of the entity responsible for collection, but which is contractually and legally "earmarked" for the exclusive benefit of the securitisation body. The sums credited to the account are therefore legally isolated from the debt collector's assets. They cannot be seized by creditors, even in the event of receivership or liquidation proceedings. This mechanism ensures that financial flows are completely sealed off and guarantees that the proceeds of assigned receivables actually reach the investors.
The liabilities of the securitisation vehicle and the securities issued
The liabilities side of the securitisation vehicle's balance sheet represents the counterpart to its assets. They consist of the various financial securities issued to finance the acquisition of receivables and risks. The structuring of these liabilities is crucial, as it enables the risk and return to be spread between different categories of investor. Understanding the nature of these securities is essential to grasp the rights and obligations of security holders and securitisation shareholders.
Units in securitisation mutual funds
When a securitisation undertaking takes the form of a fonds commun de titrisation (FCT), which is an unincorporated co-ownership, the most subordinated securities it issues are "units". These units represent a co-ownership right in all the fund's assets. They correspond to the equity tranche of the transaction. Their holders are the last to be reimbursed and absorb the first losses in the event of default on the underlying debt. In return for this high risk, they are entitled to the residual remuneration of the fund, i.e. the "liquidation bonus" once all other creditors and debt security holders have been paid.
Shares in securitisation companies
If the entity is a securitisation company (ST), which is a public limited company (SA) or a simplified joint stock company (SAS), the equivalent of FCT units are "shares". They represent the company's capital and give their holders the same rights and obligations as FCT units: they are the most exposed to the risk of loss but in return benefit from the highest potential gain. Their operation is governed by ordinary company law, with some adaptations for securitisation companies.
Debt securities (bonds, negotiable securities, foreign law)
To finance most of the assets, the securitisation vehicle issues debt securities. These instruments represent a debt owed by the securitisation vehicle to investors, and have priority over units or shares. They can take several forms:
- Bonds These are the most common type of debt security. They operate like conventional bonds, paying interest (fixed or variable) and providing for repayment of the principal at a given maturity.
- Negotiable debt securities (TCN) This is another form of debt, often used for shorter maturities.
- Foreign securities For international transactions, the entity may issue securities governed by foreign law, which demonstrates the flexibility of the French legal framework.
Common issue rules and rights of holders
The great strength of securitisation lies in the possibility of creating several classes (or "tranches") of debt securities, each with different rights in terms of payment priority, risk and return. This subordination mechanism is at the heart of liability structuring.
It operates on the principle of a "waterfall" of payments. Cash flows generated by the assets (debt repayments) are distributed to security holders according to a strict order of priority defined in the scheme's regulations. Senior tranches are repaid first. They carry the least risk and therefore offer the lowest yield. Next come the "mezzanine" tranches, with an intermediate risk/return profile. Finally, the junior or equity tranches receive funds only once all the other tranches have been paid out in full. This structuring enables the securities issued to be adapted to the risk appetites of different types of investor.
The structure of the assets and liabilities of a securitisation vehicle is a highly precise legal and financial assembly. Each component, from the nature of the receivables transferred to the hierarchy of the securities issued, is designed to guarantee the security and efficiency of the transaction. Mastery of these mechanisms is essential for both originators and investors. For an in-depth analysis of your securitisation project or to secure your investments, our firm's expertise in banking and finance law provides you with the support you need.
Sources
- Monetary and Financial Code
- Commercial code
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