Article:

Securitisations and Small And Medium Enterprises

30 March 2016

Businesses are currently faced with barriers that prevent them from raising the funds that they need to grow. Regulatory changes, pending or enacted, have inhibited the raising of capital, rather than promote it. The US economy is approximately the same size as that of Europe, but European equity and debt markets are less than a half and a third of the respective US markets.

A solution

The Capital Markets Union seeks to address this disparity.  A key focus of this is the re-building of securitisation markets to diversify funding sources.  The European Commission recognises that it needs to overcome the stigma associated with securitisations following the financial crisis of the late 2000s.  In order to do so, it is introducing a framework that makes securitisations more attractive to investors by creating criteria for ‘Simple, Transparent and Standardised’ (“STS”) securitisations.

Securitisation is in essence borrowing money that is secured by the assets of the vehicle.  The vehicle then thus becomes self-funding.  They will allow businesses to pool types of contractual debt (such as auto loans and lease receivables) or other physical assets (such as those held by property companies), and sell their related cash flows to third party investors as debt securities.

Companies in these sectors are set to particularly benefit from this initiative as these are firms that have homogenous assets which have a history of being securitised.  However, the diversity of this has not yet been explored fully.  STS could theoretically allow smaller amounts of circa £50m to £200m to be raised via a securitisation vehicle in a cost effective manner.

What constitutes STS is currently being discussed within the EU.

 

BDO can help you with this solution

Care needs to be taken when structuring a securitisation to ensure that the STS criteria are met and that the vehicle is thus attractive to investors. BDO has expertise and experience in advising clients on the structuring, implementation and operation of securitisations and can thus help you in this respect.

BDO has set up a Securitisation Team in the UK that draws on specialist corporate finance, accounting, valuation, regulatory, tax and audit skills. The UK Securitisation Team is part of a pan-European Securitisation Team which can also assist you with cross border projects involving securitisations.

BDO’s Securitisation Teams recently issued a publication entitled  ‘Capital Markets Union, Securitisation and Small and Medium Enterprises’.  In the main, this provides:

  • some practical information on what a securitisation entails,
  • an overview of one’s typical lifecycle, and
  • a description of parties to the structuring, implementation and operation process.

It also summarises the proposed STS criteria.

The five stages of the securitisation process are:

  1. Pre-transaction preparations,
  2. Setup of securitisation structure,
  3. Structuring of debt securities,
  4. Initiation of securitisation transaction, and
  5. Post-transaction obligations.

The first four are non-recurring in nature, but the fifth is.  BDO can provide services in relation to each of these across corporate finance, accounting, valuation, regulatory, tax and assurance.

Some of the proposed STS criteria require an independent third party to be engaged in order to verify compliance therewith, and this is a role that BDO can fulfil.

Read our publication on STS securitisations and our related advisory and assurance services.