Capital & Financing

Securitization

Stop borrowing against your company and start selling your cash flows: how a pool of boring, predictable payments gets a better credit rating than the business that created it.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: Whether the payments your business collects are structured enough to be sold into a separate entity and funded by investors — and what you are really keeping when you do.

What this topic is

You take a pool of contracts that will produce predictable payments — loans, leases, subscriptions, royalties, receivables — and sell them to a separate legal entity that exists only to hold them. That entity issues securities backed solely by those payments, sliced into ranked layers so that some investors are paid first and others absorb the first losses. Your company's credit stops being the thing investors are betting on; the pool's credit is.

Why it matters

It is the single largest cost-of-capital arbitrage available to a business with contractual revenue. A company that borrows unsecured in the low teens can often fund the same assets in the mid single digits through a structure — and can keep doing it, turning a balance sheet that runs out into an origination engine that does not.

Who should learn it

Founders and finance leads at lenders, leasing companies, subscription businesses, and anyone whose balance sheet fills up with receivables faster than it fills with cash — plus investors who want to read an ABS structure and know where they actually sit.

What you will understand

  • What a special purpose vehicle does and why "true sale" is the whole point
  • How tranching and credit enhancement create AAA paper out of a BB company
  • Where the excess spread goes, and why the originator keeps the first-loss piece
  • The triggers that shut a deal down, and the 2008 failure the rules were written to prevent

Prerequisites

Common misconception

"Securitization means selling the risk to someone else." Almost the opposite. The originator nearly always keeps the residual — the first-loss slice — and US rules generally require a securitizer to retain at least 5% of the credit risk of what it sells. What you sell is the funding need, not the risk. You still eat the first losses; you simply do it with somebody else's money in the assets.